Hedge Funds Jump on Gold for Life Raft as Dollar Ship Sinksby
SPDR Gold sees biggest daily fund inflow in seven months
Investors boost net-long position to highest since November
There’s no stopping the gold bulls.
Hedge funds increased their wagers on a gold rally to the highest since November, betting that this year’s 11 percent advance has more to go. Investors are also loading up on the metal through exchange-traded products, pouring $487 million into SPDR Gold Shares on Wednesday. That was the biggest daily inflow into the world’s top bullion ETF in seven months.
Gold is shining bright as the dollar trades near the lowest since November, lifting the appeal of alternative assets. At the same time, escalating tensions between the U.S. and North Korea have boosted demand for a haven, while delays in implementation for President Donald Trump’s campaign promises to cut taxes and pursue a pro-growth agenda are clouding the outlook for earnings.
“There’s an appetite for storehouses of wealth at this point,” said Peter Sorrentino, the Dallas-based chief investment officer of Comerica Asset Management Group, which oversees $43 billion, including gold ETFs. “Rather than run the risk of having your dollars eroded on a relative basis, you can use gold as a life raft to sort of avoid a sinking ship.”
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Money managers raised their gold net-long position, or the difference between bets on a price increase and wagers on a decline, by 15 percent to 161,263 futures and options contracts in the week ended April 18, according to U.S. Commodity Futures Trading Commission data released three days later.
While investors are bullish on gold, prices took a knock on Monday on speculation that pro-growth centrist Emmanuel Macron will become France’s next president by defeating far-right nationalist Marine Le Pen in the second round of the presidential elections on May 7.
Gold futures fell 1 percent to $1,276.10 an ounce at 11:31 a.m. in New York Monday, paring the month’s gain to 2 percent.
Standard Chartered Plc and Bank of America Merrill Lynch say the metal is headed towards $1,300, while Societe Generale SA recommends investors take long positions in the metal. In Washington, Trump’s 100th day in office may be marked by an embarrassing partial shutdown in government on Saturday, should he insist on including funding for his long-promised border wall with Mexico in the spending bill.
Geopolitical tensions are giving gold a boost, Standard Chartered analysts including Suki Cooper, wrote in a note April 18. Last week, Vice President Mike Pence said North Korea shouldn’t doubt Trump’s resolve after his “decisive action” against Syria and Afghanistan. The U.S. dropped the largest non-nuclear bomb it’s ever used in combat on Islamic State positions in Afghanistan April 13, days after it launched a cruise missile strike against Syria.
Events in Europe have also been a boon for gold. There are still doubts over where the U.K.’s post-Brexit economy is heading. In France, a presidential election runoff is scheduled for May 7 and candidates are stressing their commitment to fight terrorism after the killing of a policeman on the Champs-Elysees in Paris last week. Demand for gold coins is surging in the nation, with CoinInvest selling more than 1,000 ounces on Friday. That’s up from typical sales of 200 to 300 ounces, according to Chief Executive Officer Daniel Marburger.
“The important thing about gold is it provides a huge geopolitical hedge whether it’s North Korea or its French election risks, or wherever else it comes,” Francisco Blanch, the head of commodities research at Bank of America, said in a Bloomberg TV interview last week. “People are going to rush into gold.”
Open interest in gold futures has rebounded to the highest since January, while limited prices swings are proving the metal’s worth as a haven as investors seek stability. Bullion’s 60-day historical volatility fell on Friday to the lowest since October 2014. Assets in the SPDR Gold Shares ETF have climbed for three straight weeks.
Still, gold’s appeal could be curbed amid softening seasonal demand in India, and as the market may be underestimating the impact of higher U.S. interest rates, Tom Kendall, head of precious metals sales at ICBC Standard Bank, said in a report April 21.
The prospect of higher borrowing costs remain a headwind because it makes the metal less competitive against interest-bearing instruments like bonds. The Federal Reserve appears on course to raise interest rates twice more this year and officials have signaled they remain confident in their forecast for growth of around 2 percent despite a series of weak first-quarter reports.
“It’s really the dynamic between interest rates and the price of gold that explains the issue” against owning gold, Mark Heppenstall, Horsham, Pennsylvania-based chief investment officer of Penn Mutual Asset Management, which oversees $22 billion.