Gold Bulls Retreat as $1.6 Billion Erased From ETPs: Commodities

Money managers trimmed bullish gold wagers for a third week, mirroring the retreat in prices that helped erase $1.6 billion from the value of bullion funds.

The net-long position in futures and options is at its lowest in 11 weeks after speculators added the most short bets in three months, U.S. government data show. Investors sold 13.1 metric tons of gold held through exchange-traded products last week, the most since April, as prices fell 1.6 percent.

Open interest in New York futures and options is near its lowest in five years as gains in the U.S. economy, dollar and equities curb investor demand. Prices dropped last week after Ukraine’s government agreed on a cease-fire with pro-Russian separatists and the dollar appreciated to its highest in more than a year against the euro as the European Central Bank cut interest rates.

“The concern and fear we had in the marketplace a few weeks ago has subsided,” Brian Hicks, a fund manager who helps oversee $350 million at U.S. Global Investors in San Antonio, said Sept. 5. “Europe’s going to need to continue to provide stimulus, whereas here in the U.S., our central bank is going to be pulling back the reins. Those two trends will continue to push the dollar higher and be a headwind for gold.”

Futures fell 8.7 percent in the past 12 months to $1,265.50 an ounce. The Bloomberg Commodity Index of 22 raw materials dropped 4 percent, while the MSCI All-Country World Index of equities climbed 15 percent. The Bloomberg Dollar Spot Index reached a 13-month high on Sept. 5.

Short Holdings

The net-long position in gold declined 20 percent to 74,031 futures and options in the week ended Sept. 2, the lowest since June 17, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop increased 44 percent.

Holdings in the SPDR Gold Trust, the biggest ETP backed by bullion, fell 1.2 percent to 785.72 tons last week, the biggest drop since May 2. Worldwide ETP holdings dropped 2.8 percent this year to 1,713.26 tons as of Sept. 4.

Gold is heading for its first quarterly loss this year amid signs that the U.S. economy is gaining traction, increasing opportunities for the Federal Reserve to raise its benchmark interest rate for the first time since 2006. The Institute for Supply Management’s non-manufacturing index climbed to the highest in nine years, the group said Sept. 4. The survey covers a broad range of service industries that account for about 90 percent of the economy.

‘Vulnerable’ Prices

Barclays Plc forecasts gold will fall to average $1,150 in 2015, from $1,260 this year. The metal “continues to look vulnerable” in the wake of the dollar’s strength and stronger U.S. economic data, coupled with a lack of investor conviction, analysts Suki Cooper and Christopher Louney wrote in a Sept. 5 report.

Investors should keep “a sliver of gold” in their portfolios as a hedge against geopolitical risk, Michael Mullaney, chief investment officer of Fiduciary Trust Co. in Boston, which oversees $11.5 billion, said Sept. 5.

The conflict between Ukraine and Russia has killed more than 2,600 people and displaced more than another 1 million. Markets have also contended with fighting in Iraq, Syria, Israel and Gaza in the past several months.

U.S. Jobs

Fed Chair Janet Yellen has cautioned against a premature increase in U.S. borrowing costs, saying there’s still slack in the labor market. U.S. employers increased payrolls by 142,000 jobs in August, the fewest this year, the Labor Department said Sept. 5. Bullion jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low to support the economy.

“We’re bullish on gold,” Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland, which oversees $160 million, said Sept. 3. “You’ve had vacillation between good news and bad news. We’ve got a truce in Gaza, we’ve got Russia and Ukraine talking, but if anything, we’re more likely to get bad news.”

Net-wagers across 18 U.S. traded commodities dropped 6.2 percent to 558,620 contracts as of Sept. 2, the lowest since November, CFTC data show.

Bets on higher oil prices fell 9.2 percent to 172,357 contracts, the lowest since March 2013. West Texas Intermediate last week slipped 2.8 percent to $93.29 a barrel. Copper wagers tumbled 62 percent to 6,657 contracts.

Coffee Wagers

A measure of net-long positions across 11 agricultural commodities climbed 12 percent to 277,137 contracts, the government data show. That’s the first gain since June.

Coffee holdings climbed 4.4 percent to 44,977 contracts, the highest since March 2008. Futures surged 79 percent this year after drought ravaged crops in Brazil, the world’s largest grower.

Investors have the most-negative outlook on soybeans since October 2006, with a net-short holding of 25,574 contracts. Corn and soybean prices fell to four-year lows last week as rains in August improved conditions for the U.S. crops that are forecast by the government to reach records this season.

“All indications are that the farmers benefited from the near perfect growing seasons and have a lot more corn and soybeans than they thought a few months ago,” Fiona Boal, a senior analyst at Hermes Investment Management in London, which manages about $1.7 billion in assets, said Sept. 4. “There’s still downside to grain prices, but we’ve had a big move and the market is well aware of the supplies down the way.”

Download: Gartman Letter’s Gartman `Remains Bullish of Gold’(Audio)

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