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Gold Tumbles Out of Favor as Equities, Dollar Spur Cuts to ETPs

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Gold is out of favor. Investors cut holdings in bullion-backed exchange-traded products to the lowest since 2009 as surging stock markets in the U.S. and China hurt demand and prospects for rising U.S. interest rates boosted the dollar.

The assets contracted 5.4 metric tons, or 0.3 percent, to 1,594.1 tons as of Tuesday, according to data compiled by Bloomberg. The hoard slumped 39 percent since reaching a record 2,632.5 tons in December 2012.

World equities climbed in 2015 as U.S. stocks reached a record and the main gauge in China more than doubled in 12 months. The Federal Reserve has signaled it expects U.S. growth to pick up after a contraction in the first quarter and, while unlikely to raise interest rates this month, it’s left the door open to tightening later this year. Higher rates curb gold’s allure because it usually gives returns only through price gains.

“The overall direction in the market is away from risk hedges like gold and toward yielding assets like equities,” Jens Pedersen, a senior analyst at Danske Bank A/S, said by phone from Copenhagen. “And with that as the overall direction of travel, we’re seeing investors rotate out of gold ETFs.”

The Standard & Poor’s 500 Index has climbed 2.7 percent this year, closing at a record on May 21, while the Shanghai Composite Index soared 52 percent. The Bloomberg Dollar Spot Index, a gauge of the greenback’s strength against 10 major counterparts, added 4.5 percent.

SPDR Shrinks

Assets in the SPDR Gold Trust, the largest bullion-backed ETP, fell 0.6 percent to 709.9 tons on Tuesday, the lowest since Jan. 14, according to data compiled by Bloomberg. The ETP bottomed this year at 704.8 tons on Jan. 7, down 48 percent from its 2012 peak.

Gold futures for August delivery fell 0.8 percent to settle at $1,184.90 an ounce at 1:52 p.m. on the Comex in New York, the second decline in three days. Aggregate trading was 25 percent lower than the 100-day average for the time of day, according to data compiled by Bloomberg.

Not everyone is selling. Billionaire hedge fund manager John Paulson has maintained a holding in the SPDR for seven straight quarters through March 31, according to a government filing last month.

Gold will average $1,220 in the final quarter of the year, according to the median of forecasts compiled by Bloomberg. Next year, it’s seen at $1,225, the data show.

Central bank purchases rose for a 17th quarter in the first three months of the year, according to the World Gold Council, in a reversal from two decades of selling since the late 1980s. Russia, the fifth-biggest holder, tripled its hoard since 2005, while Kazakhstan boosted reserves. Many central banks are exposed to a small number of reserve currencies and look to gold as a hedge, the council said.

“Even with all the global concerns around and easy monetary policies, gold has not really been able to move higher,” Edward Dempsey, the chief investment officer at Pension Partners LLC in New York, said in a telephone interview. “Gold seems to have lost its luster.”

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