Gold Traders More Bullish as Hedge Funds Increase Bets on Gains

Gold traders have become more bullish after hedge funds boosted their wagers on higher prices speculating that Europe's financial crisis and the slow growth in the US will spur demand for the metal.

By Nicholas Larkin
November 04, 2011, 12:47 PM EDT
Business Week

Nov. 4 (Bloomberg) -- Gold traders are the most bullish in three weeks after hedge funds boosted their wagers on higher prices on speculation Europe’s debt crisis and slow U.S. growth will spur demand for the metal as a protection of wealth.

Twenty-eight of 32 people surveyed by Bloomberg expect bullion to rise on the Comex in New York next week, the most since Oct. 14 and the second increase in a row. Money managers boosted their combined net-long position in New York gold by 8.7 percent in the week to Oct. 25, U.S. government data show. Traders expect lower copper and raw-sugar prices next week, and gains in corn and soybeans, separate surveys showed.

Gold climbed above $1,760 an ounce this week for the first time in six weeks and investors increased their holdings in gold-backed exchange-traded products to a two-month high. Federal Reserve Chairman Ben S. Bernanke signaled more monetary stimulus may be needed to cut unemployment, while the European Central Bank yesterday unexpectedly lowered interest rates.

“The conditions are perfect” for gold, said Mark O’Byrne, the Dublin-based executive director of GoldCore Ltd., a brokerage that offers investors quarter-ounce British Sovereigns up to 400-ounce gold bars. “We have unprecedented levels of risk in markets. We still have ultra-loose monetary policy and the debasing of currencies. That’s obviously bullish for gold.”

Annual Gain

Gold climbed 24 percent this year to $1,756.70 today, heading for an 11th consecutive annual advance. It’s the second- best performer behind gasoil in the Standard & Poor’s GSCI Index of 24 commodities, which rose 3.2 percent. The MSCI All-Country World Index of equities fell 7.4 percent and Treasuries returned 8.5 percent, according to a Bank of America Corp. index.

Bullion may rise 11 percent to a record $1,950 by the end of the first quarter, according to the median estimate of eight of the 10 most accurate forecasters tracked by Bloomberg over the past two years. Prices jumped 6.8 percent last week, the most since January 2009.

Money managers increased their net-long position in Comex futures by the most since August to 138,846 contracts in the week ended Oct. 25, Commodity Futures Trading Commission data show. ETP holdings rose 23.1 metric tons last month, the most since July’s 96.4 tons, and touched a two-month high of 2,281.6 tons yesterday, data compiled by Bloomberg show.

Central Banks

Central banks bought 220 tons this year, according to data available at the end of September, and emerging economies will be big buyers as purchases continue for the next few years, the World Gold Council said last week. Thailand, Bolivia, Kazakhstan and Tajikistan added a combined 26.7 tons of gold valued at $1.52 billion to reserves in September, International Monetary Fund data show.

Prices doubled since the Fed cut interest rates to near zero in December 2008. Bernanke said on Nov. 2 that potential actions are “on the table,” including a third round of securities purchases, as the central bank kept plans to hold borrowing costs at a record low through at least mid-2013.

The European Central Bank cut the benchmark rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. On Oct. 27, Europe signed off on a new bailout package for Greece, including a 50 percent writedown on the nation’s debt and an expanded rescue fund. Greek Prime Minister George Papandreou yesterday signaled the abandonment of a referendum on bailout terms that had triggered a suspension of European aid.

Margin Calls

The last time traders and analysts were this bullish, prices dropped 2.8 percent the following week. Gold slumped as much as 20 percent in the three weeks after setting a record $1,923.70 on Sept. 6 as some investors sold the metal to cover losses in other markets. Global stocks are down 4.1 percent so far this week.

“Weakness in equities can and perhaps may ignite selling in gold as margin calls once again return to the fore,” economist Dennis Gartman wrote in his Suffolk, Virginia-based Gartman Letter yesterday. “We are cognizant of the fact that several very large hedge funds holding both gold and equities are always on the edge of being forced to liquidate. Should equities continue to falter, gold shall follow.”

While bullion may climb to $1,800 by the end of this month, the metal may then plunge to as low $1,000 by May, according to John Taylor, founder of FX Concepts LLC, the world’s largest currency hedge fund. Still, a drop to that level would be a “big buy,” Taylor, who in July correctly predicted that gold would reach $1,900 by October, said Oct. 19.

Yearly Gain

The gain for commodities this year is the weakest performance since 2008, as investors speculate that slower economic growth will erode demand for raw materials.

Eleven of 26 traders and analysts surveyed by Bloomberg expect copper to fall next week. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, declined 18 percent to $7,870 a ton this year.

Raw-sugar futures have dropped 9.7 percent since touching a one-month high on Oct. 17 to 25.59 cents a pound on ICE Futures U.S. in New York, extending this year’s loss to 20 percent. Six of 13 surveyed expect prices to fall next week.

Ten of 24 people surveyed anticipate gains in corn and soybeans. Corn rose 3.6 percent to $6.5175 a bushel in Chicago this year while soybeans slid 13 percent to $12.225 a bushel.

“I still think the market is slightly bearish” on commodities, as investors are concerned about Europe and economic growth in the U.S., said John Meyer, an analyst at Fairfax IS in London. Still, “the long-term outlook remains relative good. Ongoing growth in emerging markets is the key.”

--With assistance from Agnieszka Troszkiewicz, Isis Almeida and Tony C. Dreibus in London, Jae Hur in Tokyo, Helen Sun in Shanghai, Glenys Sim and Luzi Ann Javier in Singapore, Joe Richter in New York and Jeff Wilson in Chicago. Editors: Claudia Carpenter, Dan Weeks

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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