Gold Bulls Retreat as Short Holdings Rise to Highest Ever

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Speculators pared bets on rising gold prices for a seventh consecutive week, the longest retreat since 2010, as futures erased this year’s gains.

The net-long position in New York futures and options contracted as hedge funds accumulated the most bets on further declines since the U.S. government began collecting data in 2006. The most-traded Comex gold option on Oct. 3 was for the right to sell December futures at $1,100 an ounce, or almost 8 percent below where prices ended the day.

Some investors are shunning gold as the U.S. economy quickens and the dollar trades at the highest in four years, spurring expectations the Federal Reserve will raise interest rates and constrict demand for bullion as a hedge against inflation. Goldman Sachs Group Inc., Societe Generale SA and HSBC Securities (USA) say they expect lower prices.

“People have been falling out of love with gold,” Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania, said Oct. 2. “The better U.S. economy and the stronger dollar continue to lure people away.”

Futures fell 1.9 percent last week to $1,192.90 an ounce on the Comex in New York, the fifth decline and the longest slide since January 2013. After rallying today to $1,207.30, prices are 0.4 percent higher for the year. The Bloomberg Commodity Index of 22 raw materials dropped 1 percent last week and the MSCI All-Country World Index of equities 2 percent, while the Bloomberg Dollar Spot Index rose 1.1 percent.

Short Wagers

The net-long position in gold declined 15 percent to 37,743 futures and options in the week ended Sept. 30, U.S. Commodity Futures Trading Commission data show. The holdings are down 72 percent in seven weeks. Short positions increased 4.5 percent to an all-time high of 81,262 contracts. The bearish holdings doubled since the last week of August.

More than $4 billion has been erased from the value of exchange-traded products backed by gold this year. Investors sold 9.01 metric tons of metal held through ETPs last week, dragging holdings to a five-year low of 1,679.46 tons. The U.S. jobless rate declined to a six-year low of 5.9 percent in September and employers added more workers than projected, the government said last week.

Goldman, HSBC

On Oct. 2, Goldman reiterated its forecast for prices to reach $1,050 in 12 months, and HSBC cut its outlook for 2015 to $1,175 from $1,310. Recent gains for the U.S. economy mean the market will “start pricing a much faster pace of” increases for U.S. interest rates, SocGen said in a report e-mailed the next day, saying the metal will trade “well below $1,200.”

Lower prices may help to spur physical demand for the metal. Sales of gold coins by the U.S. Mint reached 58,000 ounces last month, the most since January, and more than double August’s total. Purchases at Australia’s Perth Mint climbed 89 percent in September to the highest in almost a year.

Futures climbed as much as 16 percent in 2014 to this year’s high in March after Russia annexed the Crimean peninsula, boosting demand for the metal as a haven asset. Ukrainian troops last week repelled attacks on Donetsk airport, killing 10 rebels and destroying two tanks, after a Swiss Red Cross worker’s death by shelling in a nearby residential area further frayed a month-old truce.

‘Volatile Asset’

“I don’t see gold as being particularly negative,” Michael Cuggino, who manages about $8.5 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco, said Oct. 2. “We’re long-term holders because we believe in it as a component in maintaining and building long-term wealth. It’s in the lower end of a trading range, and in my view, it’s a volatile asset. I am not overly concerned about it.”

Bullion climbed 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent, boosting inflation concerns. In 2013, bullion fell 28 percent to halt a 12-year rally as some investors lost faith in the metal as a store of value.

Prices fell 8.4 percent in three months ended Sept. 30, the first quarterly loss this year. The Fed on Sept. 17 reduced monthly bond purchases to $15 billion, on track to announce an end to the program this month. Inflation expectations, measured by the five-year Treasury break-even rate, last week reached the lowest since June 2013.

Net-wagers across 18 U.S. traded commodities rose 0.5 percent to 452,794 contracts as of Sept. 30, the first gains since June, CFTC data show. The Bloomberg Commodity Index dropped to a five-year low on Oct. 3, after tumbling 12 percent in the third quarter, the most since 2008.

Investor Outflows

About $1.05 billion was removed from U.S. ETF backed by raw materials in September, the biggest monthly withdrawal since December, data compiled by Bloomberg show. Outflows were led by redemptions from precious metals and energy.

Bets on higher oil prices rose 4.1 percent to 201,863 contracts. West Texas Intermediate crude dropped 4.1 percent last week, the most in two months.

The net-short position in copper reached 21,438 contracts, compared with 12,304 a week earlier. The world’s biggest user of the metal is China, where economists forecast growth next year will be the slowest in two decades.

A measure of net-long positions across 11 agricultural commodities rose 1.9 percent to 234,079 contracts, the government data show. Holdings are down 79 percent from this year’s peak in April, and investors are betting on declines for wheat, soybeans, cotton, sugar and soybean oil.

Cotton Bears

The cotton net-short position reached 8,168 contracts, the most-negative outlook since November 2012. Global stockpiles will climb 6 percent in the 12 months ended July 31, 2015, to a record 106.3 million bales, according to the U.S. Department of Agriculture. A bale weighs 480 pounds, or 218 kilograms.

“In the context of slowing growth in Europe and China, the world isn’t growing very quickly, and you are not seeing growth in commodity demand either,” Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments Ltd., which oversees $333.6 billion, said Sept. 30. “If the dollar keeps strengthening, commodities will fall. Unless we get a complete turnaround in growth, the commodity super-cycle, for the moment, is done.”

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