With Soros joining the fray, gold bears are in control

Gold bears are dominant again after prices resumed their slump and billionaire George Soros joined investors selling holdings in exchange-traded products that have retreated to a two-year low.

Seventeen analysts surveyed by Bloomberg expect prices to fall next week, with eight bullish and three neutral, the highest proportion of bears in two weeks. The analysts were divided a week ago after gold rebounded as much as 13 percent from the two-year low of $1,321.95 an ounce on April 16. ETP holdings slid 16 percent to 2,207.1 metric tons this year, the lowest since July 2011, data compiled by Bloomberg show.

Prices that rallied as much as sevenfold in the past 12 years entered a bear market last month after some investors lost faith in gold as a store of value and equities rallied on mounting confidence the U.S. economy is improving. The slump spurred a surge in demand around the world, with coin purchases from the U.S. Mint rising to a three-year high in April. This month’s sales are on course to be 65 percent lower and global ETP holdings increased on just one day in the past six weeks.

“The momentum has slowed significantly,” said Jeremy Baker, a senior commodities strategist who oversees about $800 million of assets at Harcourt Investment Consulting AG in Zurich and who forecasts prices may drop as low as $1,200 in six months. “The safe haven has definitely lost its gleam. We are in a declining phase here.”

Standard & Poor’s

The metal fell 18 percent to $1,371.57 in London this year and is trading 29 percent below its September 2011 record. Gold is the second-worst performer this year in the Standard & Poor’s GSCI gauge of 24 commodities, after silver. The S&P GSCI dropped 2.4 percent since the start of January and the MSCI All-Country World Index (MXWD) of equities rose 11 percent. Treasuries returned 0.1 percent, a Bank of America Corp. index shows.

Demand in India and China, the two biggest gold consumers, surged after prices slumped. The U.S. Mint, which said April 23 it ran out of its smallest gold coins, sold 42,000 ounces of American Eagle bullion coins so far in May, compared with 209,500 ounces in April, its website shows. Prices may fall to $1,100 in a year as the metal “is going to get crushed,” Ric Deverell, head of commodities research at Credit Suisse Group AG, told reporters in London yesterday.

Bullion fell in six of the past seven months as the S&P 500 Index of U.S. stocks rose to a record, the dollar reached a nine-month high against six major currencies and unprecedented money printing by the world’s central banks failed to spur inflation.Expectations (USGGBE10) for consumer price increases, as measured by the break-even rate for 10-year Treasury Inflation Protected Securities, fell 8.4 percent this year, reaching an eight-month low yesterday.

Goldman Sachs

Gold demand fell 13 percent to the lowest in three years in the first quarter as record ETP sales outweighed an increase in buying from China and India, the London-based World Gold Council said in a report yesterday. A further drop in ETP holdings will probably mean lower prices, Goldman Sachs Group Inc. analyst Jeffrey Currie wrote in a report dated May 14.

Soros Fund Management LLC cut its stake in the SPDR Gold Trust, the biggest gold ETP, by 12 percent to 530,900 shares now valued at about $71.1 million in the first quarter, a Securities and Exchange Commission filing showed May 15. The 82-year-old reduced his holding by 55 percent in the fourth quarter. Funds run by Northern Trust Corp. and BlackRock Inc. cut their stakes by more than half in the latest quarter, filings showed.

Biggest Holder

Schroder Investment Management Group bought 2.1 million shares in the SPDR (GLD) fund, a filing showed. John Paulson, the largest investor in the product, maintained a stake that lost about $165 million in the first quarter. The billionaire is standing by the metal even after his Gold Fund saw declines of about 47 percent this year, two people familiar with the matter said this month. Global gold ETP holdings tracked by Bloomberg are valued at $98.1 billion, from $147.7 billion in October.

The metal gained 57 percent since the end of 2008 as the Federal Reserve was joined by central banks in Europe and Japan in seeking to boost economic growth by buying bonds. Bank of America says policymakers cut interest rates more than 500 times since June 2007. Prices may rebound to average $1,650 in the fourth quarter, Commerzbank AG said in a May 7 report.

“When the fundamentals are the same but the price lower, it strikes me that gold is on sale,” said Adrian Day, who manages about $140 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland.

Central Banks

Central banks may help boost demand for bullion as they expand reserves. Nations from Brazil to Russia added 534.6 tons last year, the most since 1964, and may buy 450 to 550 tons this year, according to the World Gold Council. TD Securities Inc. estimates consumers will sell about 1,550 tons of used gold this year, the least since 2008, curbing a source that typically accounts for about one in every three ounces of global supply.

Almost two-thirds of the likely drop in ETP holdings has probably already happened because most institutional investors have made their sales, Deutsche Bank AG said in a May 14 report. Hedge funds and other managers cut bets on higher prices on Comex by as much as 80 percent since October, U.S. Commodity Futures Trading data show.

— Bloomberg News —