Hedge Funds Miss Out on Gold Gains as Bull Holdings Drop

Hedge funds reduced bullish gold wagers just before prices rallied the most since June on concern that global economic growth is weakening.

The net-long position in New York futures and options contracted for an eighth week, U.S. government data show. The International Monetary Fund cut its 2015 world growth forecast on Oct. 7. Minutes of the Federal Reserve’s last meeting showed policy makers saw slowing foreign expansion as a risk to the U.S., fueling bets that record-low borrowing costs will persist.

About $1.1 billion was added to the value of exchange-traded products backed by bullion last week, the most since July. The 30-day historical volatility for futures traded in New York climbed on Oct. 9 to the highest in more than a month amid renewed investor interest. Prices rose 10 percent in the first half of the year as tensions in Ukraine and the Middle East spurred demand for a haven asset.

“I don’t think we’re in a growth scenario where the Fed will be aggressively raising interest rates,” Ralph Aldis, a money manager at U.S. Global Investors, which oversees $1.1 billion, said in an Oct. 8 phone interview. “We’ve had no wage growth, and that’s probably some of the reason people are saying it doesn’t feel like we’re out of a recession yet. We’ll probably start to see some cracks here.”

Price Rally

Futures added 2.4 percent to $1,221.70 an ounce on the Comex in New York last week, the biggest gain since June and snapping five straight losses. The Bloomberg Commodity Index of 22 raw materials rose 0.2 percent last week, while the MSCI All-Country World Index of equities fell 2.7 percent.

The net-long position in gold slid 1.2 percent to 37,275 futures and options contracts in the week ended Oct. 7, according to U.S. Commodity Futures Trading Commission data published three days later. Short holdings betting on a drop contracted 0.2 percent, the first decline in eight weeks.

Gold dropped 5.9 percent last month as signs of an improving U.S. job market spurred speculation the Fed was moving closer to increasing borrowing costs. The minutes released last week highlighted growing concern among policy makers who say the strengthening dollar could hurt exports. The central bank maintained a pledge to keep interest rates low for a “considerable time.”

Physical buying has returned in India as the festival of Diwali approaches and also in China, with the rolling monthly average volume traded on the Shanghai Gold Exchange reaching the highest since May 2013, Barclays Plc said in a report Oct. 10.

U.S. Employment

Fed Bank of Dallas President Richard Fisher said Oct. 10 he expects growth to pick up in the next six months, even with signs of a slowdown in other parts of the world. The U.S. added 248,000 jobs in September, pushing unemployment to a six-year low of 5.9 percent. Gold prices will drop to $1,050 over the next 12 months as the U.S. economy accelerates, Goldman Sachs Group Inc. said Oct. 2.

Prices fell 8.4 percent last quarter as signs of a quickening U.S. recovery helped push the dollar to its biggest gain in six years. Holdings in global bullion ETPs are the lowest in five years. The Fed on Sept. 17 reduced monthly bond purchases to $15 billion, keeping it on track to announce an end to the stimulus program this month.

The Bloomberg Dollar Spot Index, which measures the currency against 10 U.S. trading partners, strengthened 6.2 percent since the beginning of July.

‘Bearish Indicators’

“There’s a convergence of bearish indicators: dollar strength, the Fed’s monetary shift towards reduction of liquidity, as well as a nonexistent inflation rate or disinflationary trends on a global basis,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said by phone Oct. 9. “What’s good for the U.S. economy is not good for gold investors.”

Net-bullish holdings across 18 U.S.-traded commodities fell 3.9 percent to 435,323 contracts as of Oct. 7, the CFTC data show.

Speculators got less bullish on oil, reducing bets by 4.8 percent to 192,208 contracts. West Texas Intermediate retreated 4.4 percent last week, the most since January.

Combined net-long positions across 11 agricultural products rose 1.7 percent to 238,113 contracts, a second increase.

The net-long position in corn dropped 14 percent to 73,093 futures and options. Prices in Chicago climbed 3.3 percent last week, the most since mid-August. The grain is rebounding after falling this month to a five-year low on the outlook for a record U.S. crop.

Slower Harvest

Rainy weather is slowing the harvest, and corn export sales advanced 23 percent in the week through Oct. 2. Shipping fees along the Mississippi River, the world’s busiest inland waterway, have more than doubled to a record in the past year, threatening to strand more grain during the busiest time of year for handlers in the U.S., the biggest global exporter.

“The story has been big crops, but that’s not news,” said Fiona Boal, a senior analyst at Hermes Investment Management in London, which manages about $1.7 billion in assets. “The story now is can we make sure we get the big crop out of the ground, and do we have issues with logistics, what happens with farmers selling and decisions about storage.”

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