Hedge Fund Gold Buyers Caught Out by Trump as Prices Plunge

  • Bullish bets undercut by prospect of more spending, tax cuts
  • Citigroup sees stronger dollar extending metal risk into 2017

U.S. President-elect Donald Trump

Photographer: Pete Marovich/Bloomberg

Add hedge funds to the list of investors caught on the wrong end of Donald Trump’s surprise election as U.S. president.

Before the Trump victory on Nov. 8, which defied most poll-based forecasts, speculators increased bets on a bullion rally for a third straight week, data released Monday show. Since then, prices posted their biggest weekly decline in three years, touching a five-month low, and holdings in exchange-traded funds backed by gold have seen their biggest two-day outflow in three years.

While gold initially surged election night -- as the prospect of political turmoil sparked a knee-jerk move toward a safe asset -- the metal’s appeal quickly faded. Not only has the dollar rallied, eroding the value of bullion, but investors now expect a jump in interest rates as the new president seeks to deliver on pledges to expand spending on infrastructure and cut taxes. Signs of a smooth transition of power have also been reassuring, Citigroup Inc. said.

“We woke up Wednesday morning to find the exact opposite of what was expected,” said Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland, which oversees around $200 million.

The net-long position for gold rose 2.2 percent to 176,374 futures and options contracts in the week ended Nov. 8, according to Commodity Futures Trading Commission data released Monday. The holdings increased 28 percent over three weeks, the longest expansion since July. Gold futures on the Comex in New York plunged 6.1 percent last week, the most since June 2013. Prices rose 0.3 percent to $1,225.90 by 7:04 a.m. local time, the first gain in seven days.

Equity Rally

Some investors are ditching gold as they pour money into equities. The Dow Jones Industrial Average touched an all-time high Monday, and last week’s 3.8 percent gain by the Standard & Poor’s 500 Index was the biggest in two years. At the same time, the Bloomberg Dollar Spot Index, which pits the greenback against against a basket of 10 currencies, rose the most last week since September 2011.

An improving U.S. economy would spell trouble for gold, especially if it forces the Federal Reserve to boost interest rates that have been at historic lows for eight years in a bid to revive growth. Traders have increased their bets on an interest-rate boost next month, with Fed-funds futures showing a 92 percent probability of a quarter-point increase at the central bank’s Dec. 13-14 meeting. On election night, the billionaire investor Stan Druckenmiller sold all his gold.

“All the reasons I owned it for the last couple of years seem to be ending,” Druckenmiller said of gold in an interview on CNBC Thursday.

Gold Outflows

Holdings in gold-backed ETFs fell 16.1 metric tons to 1,971.2 tons on Friday, capping the biggest two-day drop in three years, data compiled by Bloomberg show.

Citigroup is forecasting a stronger dollar amid higher Treasury yields into 2017, meaning the weakness in bullion may continue, particularly if inflation doesn’t materialize.

“The move in rates following the Trump win is perhaps what is now most relevant for gold going forward,” Citigroup analysts said in a report Friday. If real rates rise along with bond yields next year, gold prices “may not only fail to hit 2016 peaks next year but actually sell-off below $1,200,” the bank said.

Longer term, gold may resume its rally, Day said. Before the election, prices surged 20 percent in 2016, heading for their first annual advance since 2012 and the biggest since 2010. Demand is improving in India, the world’s biggest buyer, he said. There also are fewer new mines set to come online in the coming years, which may tighten supply, Day said.

Buying Opportunity?

Lower prices may be a buying opportunity if Trump follows through on campaign promises to tear up trade agreements and halt cheap imports to protect domestic manufacturing jobs, said Frank Holmes, who oversees around $900 million as chief executive officer of U.S. Global Investors in San Antonio. For example, slapping tariffs on Chinese products could boost prices at retail outlets owned by Wal-Mart Stores Inc. and Best Buy Co.

“You just gave a surge of inflation to the consumer,” Holmes said. If the Fed moves to “raise rates to stop a big surge, they’d definitely slow down the economy,” he said. “You’re seeing things rippling through the markets.”

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