Updated Thursday, April 17, 2014 as of 11:01 PM ET
Portfolio - Global Investing
Hedge Funds Cut Gold Bull Bets Amid Record Outflows: Commodities
by: Joe Richter
Monday, December 23, 2013

(Bloomberg) -- Hedge funds got less bullish on gold before prices dropped to the lowest level since 2010, leaving the metal poised for the worst annual loss in 32 years as investors dump bullion at a record pace.

Money managers reduced their net-long position by 2.8% to 32,524 futures and options in the week ended Dec. 17, U.S. Commodity Futures Trading Commission data show. Short holdings climbed 1.2% to 75,199, within 6% of the record reached in July. Net-bullish holdings across 18 U.S.- traded commodities rose 8.5% to a seven-week high, led by soybeans, natural gas and cotton.

Investors pulled $38.8 billion from gold funds this year, the most in data going back through 2000, according to EPFR Global, a research company. Futures settled at a three-year low on Dec. 19 in New York, a day after the Federal Reserve cut the pace of its monthly bond purchases. Prices plunged 37% since reaching a record in September 2011, U.S. equities climbed to an all-time high and the dollar is poised for its strongest annual performance since 2008.

“Gold was probably one of the easiest shorts of all time,” said Uri Landesman, the president of New York-based hedge fund Platinum Partners who helps manage about $1.3 billion of assets. “It has fallen out of favor because people felt its general security wasn’t needed in this market. People wanted to take on risk this year.”

More Declines

Bullion reached $1,186 an ounce on Dec. 19, within $6.60 of this year’s low reached in June. Thirteen analysts surveyed by Bloomberg News expect gold to fall this week, 10 are bullish and four neutral. That’s the fourth bearish outlook in five weeks.

Futures slumped 28% this year to $1,199.40 an ounce, poised for the first loss since 2000. The Standard & Poor’s GSCI gauge of 24 commodities slid 1.6%, while the MSCI All- Country World index of equities jumped 19%. The Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3.4%. The Bloomberg Treasury Bond Index fell 2.9%.

Gold “is now likely to grind lower throughout 2014”, Jeffrey Currie, the head of commodities research at Goldman Sachs Group Inc. in New York, said in a telephone interview Dec. 19. Prices will reach $1,050 by the end of 2014, the bank said in a Nov. 20 report. Societe Generale SA and Bank of America Merrill Lynch are also forecasting more declines.

Fed Taper

The Fed said on Dec. 18 it will cut monthly asset purchases, known as quantitative easing, to $75 billion from $85 billion. Policy makers raised their assessment of the employment outlook, predicting the jobless rate will fall as low as 6.3% by the end of next year, compared with a September forecast of 6.4% to 6.8%.

Gold rose 70% from December 2008 to June 2011 as the U.S. central bank pumped more than $2 trillion into the financial system by purchasing debt, increasing concern that inflation would accelerate.

Accelerating economic growth may eventually bring higher consumer prices and revive demand for gold as a hedge against inflation, said Tom Winmill, who helps manage about $250 million of assets in Walpole, New Hampshire, for Midas Funds.

Policy makers may hold interest rates near zero% even if unemployment falls below the 6.5% rate the central bank previously cited as a likely catalyst for an increase, “especially if projected inflation continues to run below” the 2% goal, the Fed said in its statement.

‘Exceedingly Bullish’

“We expect that as the economy recovers, which is the reason they’re tapering, inflation will come back,” Winmill said. “The long-term outlook is exceedingly bullish for gold.”

Prices fell after some investors lost faith in precious metals as a store of value. Bullion held in exchange-traded products plunged 32% in 2013, heading for the first decrease since the fundsstarted trading in 2003. The slump wiped $72.7 billion from the value of the assets.

Global equities have advanced to the highest in almost six years, and U.S. inflation is running at 1.2%, almost half the rate of the past decade. U.S. gross domestic product climbed at a 4.1% annualized rate in the third quarter, the strongest since the final three months of 2011, Commerce Department data showed Dec. 20.

Record Outflows

Withdrawals from gold ETPs are driving record outflows of $36.3 billion from commodity investments, according to Barclays Plc. Assets under management declined $88 billion since the start of the year through last month, the bank said in a report Dec. 17. Excluding withdrawals from precious-metal ETPs, commodities had an inflow of $4 billion.

Bullish bets on crude oil climbed 0.3% to 252,910 contracts, the highest since mid-October, the CFTC data show. U.S. fuel consumption surged 13% to 21 million barrels a day as of Dec. 13, the highest since April 2008, an Energy Information Administration report on Dec. 19 showed.

Get access to this article and thousands more...

All On Wall Street articles are archived after 7 days. REGISTER NOW for unlimited access to all recently archived articles, as well as thousands of searchable stories. Registered Members also gain access to exclusive industry white paper downloads, web seminars, blog discussions, the iPad App, CE Exams, and conference discounts. Qualified members may also choose to receive our free monthly magazine and any of our daily or weekly e-newsletters covering the latest breaking news, opinions from industry leaders, developing trends and growth strategies.

Already Registered?

Honoring the Top Branch Managers of 2013

Current Issue

The April Issue is now online!

Already a subscriber? Log in here