Hedge Funds Bought Gold in Biggest Rally Since 2011: Commodities

Hedge funds raised bets on higher hold prices for a second week as comments from Bernanke lowered expectations for an imminent tapering of stimulus. Minutes from the Fed's June policy meeting showed many officials want a stronger labor market before tapering bond purchases.

By Joe Richter
Jul 15, 2013 8:53 AM MT
Bloomberg

Hedge funds raised bets on higher gold prices for a second week as comments from Federal Reserve Chairman Ben S. Bernanke damped expectations for an imminent tapering of stimulus. Futures rose the most since 2011.

Speculators increased their net-long position by 4.1 percent to 35,691 futures and options, U.S. Commodity Futures Trading Commission data for July 9 show. Net holdings expanded even as speculators increased short bets to a record. Net-bullish wagers across 18 U.S.-traded commodities retreated 3.4 percent as investors became the most bearish ever on corn. They were more bullish on silver and palladium.

The U.S. needs “highly accommodative monetary policy for the foreseeable future,” Bernanke said July 10. Minutes from the Fed’s June policy meeting showed many officials wanted a stronger labor market before tapering bond purchases. Gold more than doubled from 2008 to a record $1,923.70 an ounce in September 2011 as the Fed cut interest rates to a record low and bought debt. Prices plunged into a bear market in April as some investors lost faith in the metal as a store of value.

“Bernanke’s comments put some positive feeling back into gold and into all commodities,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “The Fed has been working hard to show that taking back a little bit of bond buying isn’t removing accommodation, and Bernanke was very firm on that. There was a bit of a sentiment shift.”

Gold Bulls

Gold futures gained 5.4 percent to $1,277.60 on the Comex in New York last week, the most since October 2011. Traders are the most bullish in five weeks, with 19 analysts surveyed by Bloomberg expecting prices to rise this week. Nine were bearish and three neutral. Bullion for delivery in August rose 0.5 percent to $1,283.80 at 11:46 a.m. in New York.

The Standard & Poor’s GSCI Spot Index of 24 commodities percent added 1.7 percent last week, reaching a three-month high on July 11. The MSCI All-Country World index of equities gained 3.4 percent. The Bloomberg Dollar Index, which tracks the greenback against 10 major trading partners, fell 1.6 percent, the most in a month. A Bank of America Corp. Index shows Treasuries returned 0.6 percent.

Last week’s rally means gold has now reversed most of the losses made after Bernanke said June 19 that the central bank may start paring the pace of bond buying this year and end the purchases around the middle of next year if the economy improves. The metal is still down 23 percent for the year.

‘Bullish Signal’

Bullion’s drop to a 34-month low in June is spurring demand from buyers of physical metal and jewelry. The cost of borrowing gold reached a 4 1/2-year high in London last week, and may be a “bullish signal,” Standard Chartered Plc said in a report July 10. The bank said gold may rally above $1,400 by the end of the year. A scarcity of liquidity in leasing can lead to high lease rates and negative forward rates, according to the London Bullion Market Association.

While Deutsche Bank AG said July 8 that the worst of the selloff may have passed, banks including Goldman Sachs Group Inc. and Credit Suisse Group are forecasting more declines. Money managers’ holdings of short contracts reached 80,147 last week, the highest since the CFTC data begins in 2006. That can also magnify any rally as speculators close out bearish bets by buying contracts.

Assets in exchange-traded products backed by bullion have plunged 25 percent this year, wiping $59.8 billion from the value of the funds.

Stronger Dollar

Gold entered a bear market in April as U.S. inflation failed to accelerate as much as some bullion buyers had anticipated and equity markets rallied. The prospect of higher interest rates and a stronger dollar mean the recent gains may be short-lived, said John Goldsmith, the deputy head of equities with Montrusco Bolton Investments in Toronto.

“Gold may have gotten oversold and was due for a bounce, but a bounce doesn’t a bull market make,” said Goldsmith, whose company manages C$5.50 billion ($5.28 billion) of assets. “There’s upward pressure on rates and on the dollar.”

Money managers withdrew $1.42 billion from gold funds in the week ended July 10, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.68 billion, according to EPFR.

Net-long positions in crude oil climbed 6.9 percent to 281,918 contracts, the highest since May 2011, the CFTC data show. Prices climbed for three weeks, the longest rally since May, and on July 11 reached a 15-month high. U.S. inventories fell 5.1 percent in two weeks, the biggest plunge since at least 1982, Energy Information Administration data show.

Copper Holdings

The funds trimmed the net position in copper to a short 26,284 contracts, from 26,963 a week earlier. Imports of the metal by China, the biggest user, rose to a nine-month high in June, government data show. The decade-long bull market in commodities may extend for an additional 15 to 20 years, driven by urbanization and growing populations in countries including China and India, Michael Haigh, the head of commodities research at Societe Generale SA, said in Singapore last week.

A measure of net-long positions across 11 agricultural products tumbled 29 percent to 126,962 futures and options, the lowest since April. Investors more than doubled the bets on a decline in corn to 55,767 contracts, the highest since the data begins in 2006. Stockpiles in the U.S., the top grower, will more than double by the start of the 2014 harvest, the government said July 11.

Wheat Buying

Bearish wheat holdings declined to 47,844 contracts from 50,152 a week earlier. The U.S. last week cut its forecast for global inventories by 4.9 percent amid rising demand in China. U.S. export sales jumped to 1.47 million metric tons in the week to July 4, more than double a week earlier, with China buying 1.02 million tons, according to government figures.

“I’d be a buyer of commodities,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management who helps oversee more than $340 billion of assets. “Demand for commodities is going to hinge on whether the emerging world does a little better in the second half, and my feeling is that it will.”

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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