Gold Losses Not Quite Steep Enough for Bearish Hedge Funds

  • Money managers hold biggest bullion net-short position ever
  • Prices slumped 10% in 2015; Goldman, SocGen stay bearish

The longest losing streak for gold since 1998 isn’t quite enough for some investors, with hedge funds making record bets that prices will continue to fall.

Money managers are anticipating a deeper slump, holding a net-short position in the metal for seven straight weeks and expanding their wager to the most-bearish ever. The moves come after prices slumped 10 percent in 2015, capping a third consecutive annual loss.

Gold has been falling over the past year as the dollar climbed and as the Federal Reserve is poised to keep raising U.S. interest rates in 2016, cutting the appeal of bullion as a store of value. More than $10 billion was wiped from the value of exchange-traded products backed by the metal in 2015. Hedge funds aren’t the only bears. Banks including Goldman Sachs Group Inc. and Societe Generale SA are also forecasting more declines.

“Gold falling had everything to do with the Fed and the strong dollar,” said Jeffrey Sica, who oversees $1.5 billion as the president of Circle Squared Alternative Investments in Morristown, New Jersey. “If the momentum turns downward, you’ll see a heck of a lot of downward pressure on any asset, so that’s why gold became a favored asset of the short sellers.”

Net-Bearish

Prices are down 0.7 percent over the past month to $1,076.60 an ounce on the Comex in New York. The net-short position in gold futures and options increased to 24,263 contracts in the week ended Dec. 29, according to U.S. Commodity Futures Trading Commission data released Monday. That’s the most since the data begins in 2006. The figures were delayed because of the New Year holiday.

Fed policy makers in December raised the benchmark rate for the first time in almost a decade. The move had been well telegraphed, and investors were dumping the metal all year in anticipation. Assets in ETPs, which are backed by physical gold and track the price of the metal, declined about 8.5 percent in 2015 and reached a six-year low.

Traders are now focusing on the pace of further U.S. rate increases. While HSBC Holdings Plc predicts just two moves next year, Goldman is among banks that see four. Bullion will drop to $950 by the end of 2016, according to Barnabas Gan, an economist at Oversea-Chinese Banking Corp. who’s the top-ranked precious-metals forecaster.

“There is some fear that there will be further rate-hike moves,” said Uri Landesman, who helps oversee $1.35 billion in assets as the president of New York-based Platinum Partners LLP. “There just wasn’t an appetite for the metal, and I think the gold bugs were completely full and nobody else is interested.”

Haven Demand

The first trading day of 2016 brought some good news for gold supporters, as rising tension between Saudi Arabia and Iran boosted gold’s appeal as a haven. Futures climbed 1.4 percent, the most in two weeks.

Bullion, long considered a haven during times of geopolitical turmoil, failed to sustain brief gains following the Nov. 13 terrorist attacks in Paris. Even as events such as the Greek bailout negotiations in July and the downing of a Malaysian passenger jet over Ukraine in 2014 spurred earlier bouts of buying, investors have mainly shunned the metal since it entered a bear market in 2013.

“Fundamentally speaking there was a bit of a flight to safety with the Saudi Arabia and Iran unrest,” said Maria Smirnova, a Toronto-based portfolio manager at Sprott Asset Management, which oversees C$7.4 billion ($5.3 billion). “But outside of that, to be honest, the macro factors are against gold. The dollar is strong, real rates are going up, inflation expectations are very weak. So, those are all negative for gold.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE