Gold Bulls Find What Fed Giveth, It Taketh Away as Prices Wither

  • Hedge funds added most to net-long holdings since Aug. 25
  • Gold prices fall after Yellen said she sees 2015 rate rise

Gold bulls found last week that what the Federal Reserve gives, the Federal Reserve can take away.

Money managers increased net-long positions in the metal by the most since last month, after the central bank’s decision on Sept. 17 to hold U.S. interest rates at record lows. A week later, Fed Chair Janet Yellen said policy makers are still on track to boost borrowing costs this year.

Gold futures, stuck near a five-year low, fell the most in two weeks on Friday as Yellen’s comments and a report showing faster-than-estimated U.S. growth boosted prospects for the bank’s first monetary tightening since 2006. Higher rates dim the appeal of the metal because it doesn’t pay interest. Citigroup Inc. said further gold weakness was “delayed rather than avoided” by the Fed’s September decision, especially with a strong dollar eroding the value of holding bullion.

“The ingredients you need for a recipe for higher gold prices are just not there today,” said Walter “Bucky” Hellwig, who helps manage $17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama. “Yellen’s statement that they’re going to probably raise rates by year-end implies a stronger dollar, which isn’t favorable for gold.”

Gold futures for December delivery fell 1.2 percent to settle at $1,131.70 an ounce on the Comex in New York. Prices advanced 0.7 percent last week. The Bloomberg Commodity Index of 22 components rose 0.9 percent last week, while the MSCI All-Country World Index of equities lost 2.5 percent. The Bloomberg Dollar Spot Index gained 1 percent.

Gold Net Position
Gold Net Position

The net-long position more than tripled to 21,525 contracts in gold futures and options in the week ended Sept. 22, according to U.S. Commodity Futures Trading Commission data released three days later. Bullish wagers climbed 6.1 percent, the most since Aug. 25.

When the U.S. central bank left rates unchanged, policy makers cited concerns that financial-market turmoil and signs of a weakening Chinese economy could slow growth and push the Fed further away from their inflation goal. Yellen said in a speech on Sept. 24 that the reasons for the shortfall in inflation are transitory and will diminish as the effects of energy and import prices fade.

The tumult cited by the Fed in holding rates steady may lend support to gold, which is often considered a haven asset, as investors and central banks are still adding to their hoard.

Holdings in exchange-traded funds backed by gold increased about 10 metric tons since the Fed decision. China boosted its imports from Hong Kong last month as the surprise devaluation of the nation’s currency and inventory-building before the peak-consumption season spurred buying. Central banks in Russia, Kazakhstan and Belarus boosted gold reserves, according to data published by the International Monetary Fund.

Options trading is showing bears may be starting to back away. The put-to-call ratio for SPDR Gold Shares fell last week to the lowest since 2012, data compiled by Bloomberg show.

“As uncertainty moves into the global financial markets, gold has got a bid,” Chad Morganlander, aFlorham Park, New Jersey-based money manager at Stifel, Nicolaus & Co., which oversees about $170 billion, said in a telephone interview. “We believe that will continue in the short-run as market instability continues over the course of the next several months.”

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