Hedge funds are the most bullish on gold in more than two years, betting the metal’s allure will strengthen as slowing economies in Europe and Asia threaten U.S. expansion.
Speculators increased their net-long position by 80 percent this year, U.S. government data show. The U.S. economy expanded at a slower-than-forecast pace in the fourth quarter and Federal Reserve officials acknowledged global risks at the end of their policy meeting last week.
Gold prices in January capped the biggest monthly gain in three years. Policy makers in Europe and Asia are adding to stimulus as they battle cooling growth, boosting the appeal of alternatives to currencies that are being revalued. Weaker foreign expansion has increased speculation among investors that the Fed will wait longer before raising U.S. interest rates.
“If we’re in a really bad global economy and we have more downbeat news here, the motivation for the Fed to raise interest rates isn’t there,” Marty Leclerc, the chief investment officer at Barrack Yard Advisors who oversees $400 million in assets, said by phone Jan. 30. “That would hence make gold more attractive if everyone is debasing currencies.”
The net-long position in gold advanced 15 percent to 167,693 futures and options in the week ended Jan. 27, according to U.S. Commodity Futures Trading Commission data published three days later. Long holdings are the highest since 2012.
Futures climbed 8 percent last month to $1,279.20 an ounce on the Comex in New York. The Bloomberg Commodity Index of 22 raw materials dropped 3.3 percent as the MSCI All-Country World Index of equities slid 1.6 percent. The Bloomberg Dollar Spot Index added 3.3 percent. Gold futures traded at $1,272.70 an ounce at 11:30 a.m. New York time on Monday.
The U.S. economy expanded at a 2.6 percent annualized rate in the fourth quarter as imports climbed three times faster than exports, data showed Jan. 30. The same day, San Francisco Fed President John Williams said in a CNBC interview that officials referred to international developments in their Jan. 28 policy statement to acknowledge the impact of overseas events on American growth.
Assets in exchange-traded products backed by gold jumped 4.1 percent in January, the most since July 2011. The European Central Bank’s $1.2 trillion pledge for bond buying has increased demand for a store of value. Bullion priced in euros jumped 16 percent in January, about twice the gain of the metal in dollars.
Still, Fed Bank of St. Louis President James Bullard said Jan. 30 that investors are wrong to expect the central bank to postpone an interest-rate increase beyond midyear. The policy makers cited “solid” expansion for the economy in their Jan. 28 statement. Higher rates cut gold’s allure because the metal generally offers investors returns only through price gains.
Bullion tumbled 29 percent in the previous two years as the American economy improved. Commodities will lag behind equities, bonds and credit markets over the next three months because of losses in oil, gold and copper, Goldman Sachs Group Inc. said in a report dated Jan. 27. The precious metal will drop to $1,175 in 12 months, the bank said.
“Rates are going to go up sooner rather than later, which isn’t good for gold,” Jim Paulsen, the chief investment strategist at Wells Capital Management in San Francisco, said in a telephone interview on Jan. 30. “If the Fed is confident, and others are going to be confident, then you don’t need the safe-haven premium on gold.”
Net-bullish holdings across 18 U.S.-traded commodities declined 6.7 percent to 709,058 contracts as of Jan. 27, the CFTC data show. Crude wagers fell for a second week, and speculators got more bearish on copper.
A measure of net-long positions across 11 agriculture commodities tumbled 20 percent to 330,133 contracts, the biggest drop since investors were net-short in August 2013.
The money managers increased their bearish wheat holding, with a net-short position of 12,026 contracts, up from 2,462 a week earlier. That’s the most negative outlook since late November. Futures in Chicago tumbled 15 percent in January, the biggest drop for the month since 1975.
Bigger corn and wheat crops will expand world grain output excluding rice to a record and lift inventories at the end of the season to the highest in about 30 years, the International Grains Council said Jan. 22.
“The reality is the farmer is still going to plant his crops, he’s not going to walk away from his farm, and we need to balance those things together,” Gillian Rutherford, who helps oversee $20 billion as a commodities-portfolio manager at Pacific Investment Management Co. in Newport Beach, California, said by phone Jan. 30. “When we have this kind of inventory, it’s very difficult to get out of the way of that.”