Hedge Funds Are Getting Their Gold Bets Wrong

Listen to What Jim Grant Says About Gold Prices
  • Net-long wagers reach 8-month high before prices slump
  • Money managers increased bullish holdings for five weeks

Gold prices are befuddling hedge funds, which are posting a track record no better than a coin flip when it comes to betting on the metal.

The funds and other money managers have placed wrong-way wagers on gold in five of the past nine weeks, U.S. government data show. Last week, speculators increased their net-bullish position to the highest since February just before the biggest price drop since August. The precious metal has fluctuated between year-to-date gains and losses more than a dozen times in 2015 as traders weigh a dimming global economic outlook against the prospect for higher U.S. borrowing costs.

While few investors expect the Federal Reserve to raise interest rates when officials meet this week, more than half anticipate an increase within the next six months, trimming gold’s longer-term appeal. In contrast, China cut its benchmark lending rate last week, and Mario Draghi signaled the European Central Bank may add fresh stimulus measures this year. Gold loses out when monetary policy tightens because the metal doesn’t offer interest or pay dividends, unlike competing assets.

“Gold has been in a broad trading range,” said Michael Cuggino, the San Francisco-based president and portfolio manager at Permanent Portfolio Family of Funds Inc., which oversees about $4 billion. “It remains there and continues to trade off of central bank expectations and lack of inflationary pressure. It trends up, it trends down. From a trading perspective, there’s no compelling reason either to buy it or sell it at the moment.”

Futures fell 1.7 percent to $1,162.80 an ounce on the Comex last week, the biggest drop since Aug. 28, and settled at $1,166.20 on Monday. Speculators boosted their gold net-long position by 48 percent to 121,804 futures and options contracts as of Oct. 20, according to Commodity Futures Trading Commission data released three days later. Long holdings rose for a fifth straight week, the most since January.

Goldman Sachs Group Inc. remains bearish, with analysts saying in a report dated Oct. 21 that they expect the Fed to act in December, with additional rate increases expected through 2016. The bank forecasts the metal will fall to $1,100 in three months and $1,000 in a year. Prices are heading for a third straight annual drop, the worst performance since 1998, as low inflation and a stronger dollar cut the appeal of the metal as a store of value.

“Gold just doesn’t have the sponsor it used to have, whether that be people that were buying it as a store of wealth during a particularly difficult period like we saw during the financial crisis, or whether that be significant central-bank buying, or even on the supply side,” Fiona Boal, director of commodity research at Fulcrum Asset Management in London, which oversees $3.6 billion, said in a telephone interview.

Gold bulls are betting that weaker global economies will diminish the outlook for U.S. growth and force Fed officials to keep interest rates near a record low for longer. Traders are now pricing in a 36 percent chance that rates will rise in December, down from about 50 percent just two months ago. The metal surged 70 percent from December 2008 through June 2011 as the U.S. central bank fanned inflation fears by purchasing debt and holding borrowing costs near zero percent in a bid to shore up growth.

The number of funds with long positions in the metal jumped 26 percent to 98 as of Oct. 20, the CFTC data show. That’s the highest since November 2012. Holdings in exchange-traded products backed by bullion rose five times in the past six weeks.

“I’m definitely leaning more bullish,” Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland, which oversees $145 million, said in a telephone interview. “The Fed has repeatedly suggested or indicated that rates are coming soon and that hasn’t happened. I think the market is just beginning to say that this is the boy that’s cried wolf and it’s not going to happen.”

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