Speculators Lower Gold Bull Wagers on U.S. Rate Outlook

By Marvin G. Perez

Photographer: Andrew Harrer/Bloomberg

Federal Reserve Chair Janet Yellen said Aug. 22 that if economic progress “continues to... Read More

Investors are exiting the gold market on speculation that signs of sustained U.S. economic growth will push the Federal Reserve closer to raising interest rates, cutting demand for bullion as an inflation hedge.
Hedge funds reduced their bullish gold bets for the third time in four weeks, and open interest in New York futures and options are near the lowest in five years, U.S. government data show. Prices tumbled 2 percent last week, the most since late May, erasing $1.2 billion from the value of exchange-traded products backed by bullion.
Gold has dropped 5.1 percent from 16-week high in mid-July on gains for U.S. housing and manufacturing. Federal Reserve Chair Janet Yellen said Aug. 22 that if economic progress “continues to be more rapid than anticipated,” an interest-rate increase could come sooner than
currently expected. Bullion tumbled 28 percent last year as the central bank started reducing bond buying.
“Gold bugs are on the run, and we believe that prices will continue a long-term downward trend,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said Aug. 21. “In quiet times, when the pendulum seems to be improving, or the global economy improves and news flow is bright, gold loses its bid immediately.”
Futures dropped 8.2 percent in the past 12 months to $1,278.50 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials fell 4.7 percent, while the MSCI All-Country World Index of equities climbed 15 percent.

Long Wagers

The net-long position in gold declined 13 percent to 116,916 futures and options contracts, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop jumped 17 percent to 24,442, while long wagers retreated 8.5 percent to 141,358, the biggest drop since March.
The aggregate number of gold futures and options contracts yet to be closed, liquidated or delivered dropped 1.2 percent to 574,443 contracts on Aug. 19, CFTC data show. Open interest reached 563,036 on Aug. 5, the lowest since September 2009.
Fewer Americans than forecast applied for unemployment benefits last week, while housing starts surged in July to the highest in eight months. Minutes of the July Fed policy meeting released Aug. 20 showed some officials “were increasingly uncomfortable” with the central bank’s forward guidance that calls for keeping its benchmark interest rate low for a “considerable time.”

Fed Tapering

Gold jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low. The central bank reduced its monthly bond-buying program to $25 billion on July 30, making a sixth consecutive cut of $10 billion.
Bullion has rallied 6.5 percent in 2014, beating gains for broad measures of commodities, global equities and Treasuries. Investors returned to the metal as spreading violence in Eastern Europe and the Middle East boosted demand for a haven.
Sunni lawmakers last week quit talks on forming a new Iraqi government after gunmen killed scores of worshipers at a Sunni mosque in a province neighboring Baghdad, sending sectarian tensions soaring.
Holdings in global gold-backed ETPs climbed for 10 straight sessions through Aug. 22, the longest stretch since December 2012. The assets rose by 15.01 metric tons last month, the most since November 2012, even as New York futures declined 3 percent.

‘Political Risk’

“The safe-haven aspects of gold demand particularly relate to the Middle East,” Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments Ltd., which oversees $333.6 billion, said Aug. 22. “Political risk remains high, but it’s stabilized at a high level.”
Combined net-wagers across 18 U.S. traded commodities dropped 9.4 percent to 623,127 contracts as of Aug. 19, the lowest since December, the CFTC data show. That was the eighth straight decline.
Bets on higher oil prices fell 14 percent to 188,589 contracts last week, the lowest since April 2013, the government data show. West Texas Intermediate dropped for five straight weeks, the longest streak in nine months, on concern refineries will reduce demand for crude as the end of the summer driving season approaches.
Copper holdings dropped 55 percent to 8,657 contracts, the CFTC said. That’s the fewest since investors held a net-short wager in mid-June.

Farm Bets

A measure of net-long positions across 11 agricultural products declined 7.3 percent to 250,332 contracts, the lowest since January, the CFTC data show.
Bullish bets on corn fell 4.4 percent to 64,719 contracts, the fifth decline in six weeks. From Ohio to Nebraska, thousands of field inspections last week during the Pro Farmer Midwest Crop Tour show output in the U.S., the world’s top producer, will be 0.4 percent above the government’s estimate. Prices in Chicago have fallen 12 percent this year.
“This year there is going to be a very big crop, and I expect prices to bottom in about a month once harvests start to get in,” Kelly Wiesbrock, a portfolio manager at Harvest Capital Strategies in San Francisco, which oversees $1.8 billion, said Aug. 21. “The only wild card would be if we get some early fall or winter weather that would disrupt the harvest.”