Gold Bulls Retreat as Prices Drop to Four-Month Low

Date: Tuesday, December 3, 2013
Author: Joe Richter, Bloomberg

Hedge funds grew less bullish on gold for a fourth straight week, the longest stretch since November 2012, as mounting concern that the Federal Reserve will curb monetary stimulus sent prices to a four-month low.

The net-long position in gold fell 28 percent to 31,735 futures and options in the week ended Nov. 26, the lowest since June, U.S. Commodity Futures Trading Commission data show. Short bets rose 20 percent to 74,964, the highest since July. Net-bullish wagers across 18 U.S.-traded commodities gained 11 percent to 563,786 contracts as soybean holdings climbed. Bets on a decline for wheat prices reached a record.

Gold is heading for the first annual drop in 13 years after equities rallied to the highest since 2008 and inflation failed to accelerate. Fed policy makers signaled Nov. 20 that the labor market will improve enough to warrant slowing their $85 billion of monthly bond purchases. U.S. manufacturing unexpectedly accelerated in November at the fastest pace in more than two years, a private report showed yesterday.

“With an improving economy and job market, coupled with Fed actions, gold will continue to deteriorate,” Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $150 billion of assets, said by telephone. “There’s no need for a safe haven. There’s no need to be overweight in gold.”

Futures reached $1,217.10 an ounce after the close of regular trading in New York yesterday, the lowest since July 8. Eighteen analysts surveyed by Bloomberg News expect bullion to fall this week, nine were bullish and three neutral. The metal fell 5.5 percent in November, the biggest drop since June, when prices reached a 34-month low.

2013 Losses

Bullion tumbled 27 percent this year, heading for the biggest annual slump since 1981. The Standard & Poor’s GSCI gauge of 24 commodities dropped 3.6 percent. The MSCI All-Country World Index of equities climbed 18 percent, while the Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3.9 percent. The Bloomberg Treasury Bond Index fell 2.3 percent.

Some investors have lost faith in the metal as a store of value as prices tumbled into a bear market in April after the U.S. economic recovery gained traction.

Sales of gold coins and minted bars from Australia’s Perth Mint, which refines most of the bullion from the world’s second-biggest producer, fell 32 percent to 52,700 ounces last month from 77,255 in October, the mint said on its website yesterday. Gold-coin sales by the U.S. Mint also slid in November. Global holdings in exchange-traded products backed by bullion tumbled 30 percent this year to the lowest since March 2010, erasing more than $69 billion from the value of the assets.

U.S. Manufacturing

The Fed will pare monthly asset purchases to $70 billion at its March 18-19 meeting, according to a Bloomberg survey last month. The central bank’s next gathering is Dec. 17-18. The Institute for Supply Management’s index rose to 57.3 in November, the highest since April 2011, the Tempe, Arizona-based group said yesterday. Readings above 50 indicate growth. Manufacturing accounts for about 12 percent of the economy.

Prices jumped 70 percent from December 2008 to June 2011 as the Fed expanded its balance sheet through debt purchases, fueling expectations of accelerated inflation and a weaker dollar.

Physical demand for bullion may help support prices, according to Peter Jankovskis, who helps oversee $3.5 billion as co-chief investment officer of Lisle, Illinois-based OakBrook Investments LLC.

China Imports

Gold shipments to China from Hong Kong rose in October to the second-highest on record as jewelers and retailers bought the metal to build up inventories ahead of a peak-demand season at the end of the year. Prices climbed 8.4 percent last quarter, the first gain in a year, as physical buyers increased purchases.

Chinese consumer demand for the metal rose 30 percent in the 12 months through September, according to the World Gold Council. That puts it on track to overtake the top consumer India, where purchases gained at a slower rate of 24 percent amid government import restrictions.

“There’s strength in some of the emerging markets, where gold is prized,” Jankovskis said in a telephone interview. “As long as these economies remain fairly strong, one could be somewhat bullish at these levels. We’re seeing growth in the size of the middle class in emerging economies, and that’s helping physical demand for gold.”

Gold Bears

Speculators cut their net-long position in gold by 68 percent in the four weeks through Nov. 26. Short bets climbed for four straight weeks, the longest advance for bears since July. Long holdings reached 106,699 contracts, the lowest since July 2012.

Gold may decline to $1,100 by April if prices break below a so-called pennant pattern that was formed by a series of lower highs and higher lows, according to Fain Shaffer, the president of Infinity Trading in Indianapolis.

Investors pulled a record $34.1 billion from commodity funds since the end of December, according to EPFR Global, which started tracking the flows in 2000.

The year’s slump for commodities spurred bear markets in everything from gold to corn to sugar. The declines may deepen by the end of December, if history is any guide. The GSCI gauge fell in December 83 percent of the time since 1971 when the benchmark gauge was posting losses for the year through November, data compiled by Bloomberg show.

Crude Wagers

Bullish bets on crude oil fell 3.3 percent to 228,819 contracts, the fourth drop in five weeks, the CFTC data show. The U.S. is extracting the most oil since 1989 as producers tap shale-rock formations, cutting costs for refiners and driving fuel prices at the pump toward $3 a gallon for the first time in three years.

Speculators reduced their net-short bets on copper to 19,738 contracts, compared with 24,067 a week earlier, the CFTC data show. Investors have been wagering on a price decline for three straight weeks. Stockpiles monitored by exchanges in London, Shanghai and New York are 15 percent higher than a year earlier.

A measure of speculative positions across 11 agricultural products dropped 2.6 percent to 286,072 contracts, the lowest since Sept. 17, the CFTC data show. The S&P’s Agriculture Index of eight commodities tumbled 20 percent this year.

Food Prices

The World Bank’s Food Price Index fell 6 percent from June through October as fresh supplies swelled stockpiles, according to a report released Nov. 26. The gauge was 12 percent lower than a year earlier and 16 percent below a record set in August 2012, the Washington-based bank said.

Money managers expanded their net-short position in wheat to 66,041 contracts from 55,199 a week earlier. That’s the most-bearish outlook since the data begins in June 2006. World production in the 12 months that began June 1 will rise 7.8 percent to a record 706.38 million metric tons, according to the U.S. Department of Agriculture.

The net-long position in sugar fell 18 percent to 112,627 contracts, the lowest in eight weeks and the fourth straight decline. Global stockpiles will increase 0.5 percent to an all-time high of 43.379 million tons in the marketing period ending in 2014 for most countries from a year earlier, the USDA said Nov. 21. Prices are heading for a third straight annual decline, the longest slump in 21 years.

“The recent weakness in commodities looks like it will continue,” said Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “Gold is still in a down trend. There’s more supply coming on for a lot of commodities, especially oil and copper. Whereas a few years ago you had rising demand along with supply constraints, it’s now the opposite. There are questions over demand, and supply is up.”