Hedge funds cut bullish bets on gold before rally

Hedge funds cut bullish gold bets for a second week last week, reducing long contracts to the lowest since June, before prices rose the most in a month as the US Federal Reserve unexpectedly decided not to taper stimulus.

The net-long position held by speculators fell 17 per cent to 70,113 futures and options in the week to last Tuesday, US Commodity Futures Trading Commission data shows. Long wagers fell 6.8 per cent to 109,217, the fewest since June 25, and short bets rose 21 per cent.

Bullion is heading for the first annual loss since 2000 after some investors lost faith in the metal as a store of value amid evidence of faster economic growth. The Fed said on Wednesday that it needed to see more signs of sustained gains in the labour market before reducing monthly bond purchases of US$85 billion.

The move surprised analysts and bolstered demand for gold as a hedge against inflation. Futures surged 4.7 per cent the next day, the most since March 2009.

"A lot of people got caught offside with the Fed's lack of action," said Michael Mullaney, the Boston-based chief investment officer for Fiduciary Trust. "Precious metals had been falling like a stone. The Fed factor has been taken off the table for now, which will be bullish for gold."

Futures climbed 1.8 per cent to US$1,332.50 an ounce in New York last week, the biggest gain since August 16.

Gold more than doubled from 2008 to an all-time high of US$1,923.70 in September 2011 as the Fed cut interest rates to a record and bought debt, pumping more than US$2 trillion into the financial system. Fed chairman Ben Bernanke said last week that the decision on cutting asset purchases depended on economic data and there was no set timetable for tapering.

The Fed's decision and a debate among US lawmakers about whether to raise the United States' US$16.7 trillion debt ceiling "leaves risks to gold prices as skewed to the upside in the near term", Goldman Sachs said in a report last week. Investors should view the rally as an opportunity to sell, Societe Generale said.

Investor holdings of gold through exchange-traded products have fallen 26 per cent this year, erasing US$59.3 billion from the value of the funds.

John Paulson, the biggest investor in the SPDR Gold Trust, the largest bullion exchange-traded product, cut his stake by 53 per cent last quarter.