Photographer: Andrey Rudakov/Bloomberg

Funds Step Back From Gold Before Yellen Says Rate Rise Is Coming

  • Futures last week posted biggest decline since November
  • ‘Momentum chasing for gold has come off,’ investor says

Hedge funds decided to take a breather from gold just before Janet Yellen gave investors more reason to ditch the precious metal.  

After a roaring start to the year, the excitement over bullion has dissipated this month on increasing expectations that the Federal Reserve is getting ready to raise U.S. interest rates again as the economy improves. Last week, money managers who have been bullish since January reduced their wagers on a price rally by the most this year.

Fed Chair Yellen, in a speech on Friday, threw her support behind a growing consensus at the central bank in favor of another interest-rate increase soon. Higher rates hurt gold because the metal becomes less competitive against interest-bearing assets. Rising borrowing costs also tend to strengthen the dollar, which makes bullion less appealing as an alternative.

“Clearly, some of that momentum-chasing for gold has come off,” Josh Crumb, the chief strategy officer who helps oversee $1.7 billion at Toronto-based GoldMoney, said in a phone interview. “People said ‘Maybe now is not the time. Maybe the Fed is right that the data is OK, and maybe the economy is OK.’”

Wagers Drop

The net-long position in gold futures and options fell 26 percent to 169,491 contracts in the week ended May 24, according to U.S. Commodity Futures Trading Commission data released three days later. Futures lost 2.9 percent last week to settle at $1,216.70 an ounce in New York, the biggest such decline since Nov. 6. They traded 0.6 percent lower at $1,209.70 on Monday.

Prices in May are heading for the first monthly decline this year. Improving U.S. growth is adding to the negative outlook for the metal, which some investors buy to guard against economic malaise. U.S. gross domestic product rose in the first quarter at a slightly faster pace in the first quarter than the government first estimated, Commerce Department figures showed Friday.

An expanding economy also strengthens the case for Fed officials to go back to raising rates, after lifting borrowing costs in December for the first time in almost a decade. A move could happen “in coming months,” Yellen said Friday during remarks at Harvard University in Cambridge, Massachusetts. Gold posted three straight annual declines through 2015 as U.S. growth improved while inflation stayed tepid. 

Bull Market

Bullion ended the losing steak as it surged into a bull market in March. Even with losses in May, prices are still up 14 percent this year amid an “anemic” recovery for global growth, said Jeffrey Sica, who oversees $1.5 billion as the president of Circle Squared Alternative Investments in Morristown, New Jersey. Concerns over economies in Europe and Asia spurred demand for the metal as a haven, and investors poured $8.9 billion into SPDR Gold Shares this year, the most of all the exchange-traded funds tracked by Bloomberg.

With traders putting the odds of a U.S. rate increase by July at more than 50 percent, many investors are ready to take a step back from the metal. Prices have lost more than 7 percent since reaching this year’s high on May 2.

“People are anxious to harvest profits and maybe come back later,” said Mariann Montagne, an Arden Hills, Minnesota-based senior investment analyst and portfolio manager who helps oversee $989 million at Gradient Investments. “When you get something that’s up 20 percent in the course of a few months, you’d expect a pullback.”

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