Gold gains set to reverse as hedge funds cut bets on rally
Money managers trim net-long positions as gold price rally snaps, but investors are still adding to holdings through ETPs backed by metal
Hedge funds cut bets on a gold rally for the first time in six weeks as prices snapped the longest stretch of gains since August 2011.
Gold climbed 9 per cent this year, outpacing gains for commodities, equities and treasuries, partly as tensions between Ukraine and Russia increased demand for a haven.
The gains are set to reverse as the economy improves and the Federal Reserve "eventually" increases US interest rates, the World Bank said last week.
"We've probably already seen the extremes of positive sentiment in the gold market," said Rob Haworth, a senior investment strategist at US Bank Wealth Management, said. "We see the direction for gold is generally down, just because of the pace of economic growth improving. We see the Fed is going to start raising rates sooner than the market expects, probably sometime in the second quarter of next year."
Futures fell 0.8 per cent since the end of June to US$1,311 an ounce in New York. The MSCI All-Country World Index of equities rose 0.2 per cent.
The net-long position in gold fell to 131,971 futures and options contracts as of July 15, US Commodity Futures Trading Commission data showed. Short holdings betting on a drop surged 32 per cent, the biggest gain in seven weeks.
While Fed chief Janet Yellen said she expects borrowing costs to remain low for a considerable time, analysts at Goldman Sachs and JP Morgan Chase have brought forward estimates for when the central bank will boost rates.
The Fed may have to raise rates more quickly than planned as unemployment falls and inflation quickens, St Louis Fed president James Bullard said.
Bullion tumbled 28 per cent in 2013, the most in three decades, as a stronger US economy and the prospect of less monetary stimulus curbed demand for alternative assets.
Prices will decline to an average US$1,230 next year from US$1,250 this year and US$1,411 in 2013 last year, according to World Bank estimates.
Investors are still adding to holdings through ETPs, as the assets increased for four consecutive weeks, the longest stretch since 2012. Some traders are seeking a hedge against turmoil in eastern Europe and the Middle East.
Gold futures on July 17 posted the biggest gain in four weeks, after 298 people were killed in a jet crash near the border between Ukraine and Russia. President Barack Obama said the next day the US had concluded that a surface-to-air missile launched from insurgent-held territory in eastern Ukraine brought down the Malaysia Airlines jetliner.
At least 272 Palestinians, including dozens of children, and two Israelis have been killed since fighting intensified in the region.
"You tend to see gold go up when people are worried," said Quincy Krosby, a market strategist at Prudential Finan- cial. "A belief that geopoliti- cal events will gather centre stage again, either in Ukraine and/or the Middle East, would be rationale for continued purchases."
Investors added about US$251 million to exchange-traded funds that track commodities, including a US$187.6 million gain to those backed by precious metals, in the five days to July 17.
Gold futures fell 0.6 per cent a day after the jetliner crash, and US stocks rallied as investors refocused on economic prospects after sales topped analyst estimates at Google, the world's third-largest company.
