Hedge funds cut gold bullish bets as bullion recovery stalls

Prices fall 2.6 per cent since June as signs of faster US growth fortifies the case for an interest-rate rise and reduces bullion's value as a haven

PUBLISHED : Tuesday, 02 September, 2014, 12:38am
UPDATED : Tuesday, 02 September, 2014, 4:45am

After gold's rally in the first half of the year beat gains for commodities, equities and Treasuries, bullion is back to being out of favour with investors.

Hedge funds cut their bullish gold bets for the fourth week in five, sending holdings to a two-month low, United States government data shows. Open interest in New York futures is the smallest in five years, and assets in global exchange-traded products backed by the metal in August posted the biggest monthly drop since May.

Gold prices fell 2.6 per cent since June, heading the first quarterly loss this year, as signs of faster US economic growth bolstered the case for the Federal Reserve to raise interest rates, cutting demand for an inflation hedge. Holdings through exchange-traded products slumped for the fourth time in five months as violence from Ukraine to the Middle East was not enough to revive buying.

"In an environment of sustainable growth, gold is not very attractive, and higher interest rates cannot be good for gold in the long term," said Jim Paulsen, chief investment strategist at San Francisco-based Wells Capital Management. "The days of extraordinary impact from military conflict has diminished."

Futures dropped 7.8 per cent in the past 12 months to US$1,287.30 an ounce in New York. The MSCI All-Country World Index of equities climbed 18 per cent.

The net-long position in gold declined 21 per cent to 92,734 futures and options contracts, US Commodity Futures Trading Commission data shows. That was the biggest decrease since June 3. Short holdings betting on a drop jumped 51 per cent to 36,877, while long wagers retreated 8.3 per cent.

The US economy, the world's largest, grew more than previously forecast in the second quarter, government data showed on August 28.

Orders for durable goods jumped in July by the most on record, while consumer confidence climbed in August, separate reports showed last week. Holdings in the SPDR Gold Trust, the biggest exchange-traded product backed by the precious metal, dropped three times in the past four weeks.

A "lack of conviction" is keeping investors on the sidelines, Suki Cooper, an analyst at Barclays, wrote in a report on August 25.

Last year, gold slumped 28 per cent, the most since 1981, as equities surged and the Fed started slowing the pace of monetary stimulus.

The central bank reduced its monthly bond-buying programme to US$25 billion on July 30, the sixth consecutive cut of US$10 billion since November. Chairman Janet Yellen said on August 22 that if progress in labour markets "continues to be more rapid than anticipated", interest rates may rise sooner than expected, and further increases could be more rapid.

Bullion rebounded 7.1 per cent this year as tensions in Eastern Europe, Iraq and the Middle East increased the appeal of the metal as a haven.

Almost 2,600 people have died in the conflict between Russia and Ukraine.

While there are some signs of improvement for the US economy, the recovery is uneven, leaving room for the Fed to continue to hold borrowing costs near zero per cent, according to Jeff Sica at Sica Wealth Management.

American consumer spending unexpectedly dropped in July, the first decline in six months, Department of Commerce data showed on August 29. Gold jumped 70 per cent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at a record low.

"The Fed is not in a hurry to raise rates, and it is prudent to hold on to gold," Sica said. "Gold's gains will stick as the turmoil in Ukraine and Iraq shows no signs of coming to an end."

Combined net-wagers across 18 US traded commodities dropped 4.4 per cent to 595,756 contracts as of August 26, the CFTC data show. That is the lowest since November.

Bets on higher oil prices rose 0.6 per cent to 189,753 contracts, the first gain in five weeks. West Texas Intermediate climbed 2.5 per cent last week, the most since June 13.