Gold Bulls Left Disappointed as Fed Mulls December Rate Increase

  • Spot prices drop most this month after policy statement
  • Gold options signal traders are bracing for more losses

Janet Yellen is leaving gold bulls with a familiar feeling: disappointment.

For more than a month, investors had been piling into the metal anticipating that the Federal Reserve chair and her colleagues would be forced keep U.S. interest rates near a record low for longer. Instead, the officials on Wednesday said they expect “moderate” growth for the economy, and left open the option to raise rates at their December meeting. That boosted demand for gold as a store of value. Prices dropped after the policy statement, retreating from the biggest gain in more than two weeks.

The Fed’s statement also means vindication for Goldman Sachs Group Inc., which has stuck with its bearish view even as hedge funds added to their bullish holdings. It’s a story that’s played out all year. Even as bulls including billionaire Paul Singer have lauded gold, every time prices started to gain some steam, they’ve come back down. The metal is still on pace for a third straight annual loss.

“The evidence of a strong turn around in gold has yet to show itself,” said Alan Gayle, a senior strategist for Atlanta-based RidgeWorth Investments, which oversees $40 billion. “Unless you’re in it for very a short-term trade, buying gold is still premature.”

Gold for immediate delivery fell 0.9 percent to settle at $1,156.10 an ounce on Wednesday, retreating from gains of as much as 1.4 percent. The metal fell as much as 1.2 percent after the statement, the biggest intraday loss since Sept. 30. The 30-member Philadelphia Stock Exchange Gold and Silver Index of shares dropped 0.9 percent on Wednesday and is down 22 percent this year. Spot bullion was down 0.3 percent to $1,152.14 at 10:50 a.m. New York time.

Higher rates are a problem for gold bulls for a few reasons. First, bullion loses out because it doesn’t offer interest or pay dividends, unlike competing assets. Also, more confidence from the Fed on the outlook for U.S. growth diminishes the appeal of the metal as a haven, while also boosting the dollar and cutting the appeal of alternatives.

Hedge funds had been counting on a more dovish statement from the Fed. The funds and other money mangers boosted their gold net-long position in the past five weeks to the highest since mid-February. Open interest in futures, a tally of outstanding contracts, last week reached the highest since November 2012, the latest government data show. That also signaled that investors were preparing for a rally, according to RBC Capital Markets.

The funds’ hopes were dashed when the Fed on Wednesday signaled less concern that deteriorating global economies will be a drag on U.S. growth and said they’ll consider tightening monetary policy at their next meeting in December, while stopping short of making a commitment to act this year. Fed-fund futures show that traders are now pricing in a 48 percent chance of an interest-rate increase in December, up from 35 percent on Tuesday.

Goldman Sachs analysts said 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 down about 40 percent from a record in 2011 as low inflation and equity gains spurred some investors to lose faith in bullion as a store of value. Gold is still more than 50 percent higher than it’s 20-year average, keeping jewelry demand depressed.

Options signal that traders are bracing for more losses. A put giving owners the right to sell December futures for $1,100 surged as much as 67 percent, erasing earlier losses. It was the biggest intraday advance on record. More than a 1,100 lots changed hands, giving it the second-highest volume for the day on the Comex in New York.

“The Fed got more hawkish, and that’s negative for gold,” said Atul Lele, the chief investment officer overseeing $5.3 billion in assets at Nassau, Bahamas-based Deltec International Group. “As a safe haven, there’s a waning need. There’s fewer needs for inflation hedges. And as a commodity, gold is relatively expensive.”

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