Hedge funds raise gold wagers as Chinese demand increases

In face of rally, some analysts expect gains to be short-lived

Jan 20, 2014 @ 8:54 am

hedge funds, gold, commodities
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Hedge funds raised bullish gold wagers to the highest point in eight weeks as signs of stronger Chinese demand drove prices to the longest rally since August. The Goldman Sachs Group Inc. says the gains will be short-lived.

The net-long position in gold climbed 7.6% to 43,277 futures and options in the week ended Jan. 14, Commodity Futures Trading Commission data show. Long wagers rose 4.7%, outpacing the 2.9% gain in short bets. Net-bullish holdings across 18 U.S.-traded commodities advanced 2.6%, led by cattle, silver and soybeans.

Gold has climbed for four straight weeks, rebounding 4.1% this month after a 28% plunge in 2013 that was the biggest since 1981 as some investors lost faith in the metal as a store of value. Lower prices are attracting buyers in Asia, with deliveries by the Shanghai Gold Exchange almost doubling in 2013. The bear market is unlikely to reverse, and bullion will “grind lower” over 2014 as the U.S. economy gains momentum, Goldman analysts said in a report Jan. 12.

“There's a tremendous divide in the gold market,” said Jeff Sica, who helps oversee more than $1 billion of assets as president of Sica Wealth Management. “Demand for jewelry in China is still relatively strong, and I think it will remain strong. The bears ignore physical demand and think that gold is not relevant when there's no economic crisis.”

GOLD RALLY

Futures in New York rose 0.4% last week to $1,251.90 an ounce, as the Standard & Poor's GSCI Spot Index of 24 raw materials climbed 0.9%. The MSCI All-Country World index of equities gained 0.1%. The Bloomberg Dollar Spot Index, a gauge against 10 major trading partners, advanced 0.8%.

The Shanghai Gold Exchange, China's largest bullion bourse, delivered 2,197 metric tons to customers in 2013, compared with 1,139 tons in 2012, it said Jan. 15. China topped India as the world's top buyer last year as demand probably reached a record, the World Gold Council estimates.

The U.S. Mint sold 83,500 ounces of American Eagle gold coins so far in January, heading for the biggest monthly total since April. Holdings in the SPDR Gold Trust, the biggest exchange-traded product backed by the metal, jumped 0.9% on Jan. 17, the biggest gain since November 2011. A day earlier, the assets were at the lowest level since January 2009.

Prices will probably rise to $1,400 by the end of the year as the trend of investor selling in ETFs reverses and demand in Asia gains, Commerzbank AG analysts led by Eugen Weinberg said in a report last Friday.

GOLDMAN VIEW

Goldman expects bullion to fall to $1,050 in the next 12 months as the Federal Reserve reduces monetary stimulus, analysts led by Jeffrey Currie, the bank's head of commodities research, said in the report last week. Precious metals are Morgan Stanley's “least preferred” commodities, and physical demand from China and India won't be enough to support prices, analysts Adam Longson, Bennett Meier and Peter Richardson said in a Jan. 17 report.

The Fed, which said in December it would trim its monthly asset purchases to $75 billion from $85 billion, probably will keep cutting bond buying by $10 billion at each policy meeting, according to a Bloomberg survey of economists. The central bank next meets Jan. 28 and 29. Gold rose 70% from December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system. Futures have plunged 35 percent from a record $1,923.70 in September 2011.

Investor holdings through ETPs fell 33% in the past year, erasing $71.3 billion from the value of the funds, data compiled by Bloomberg show.

Billionaire John Paulson, the largest holder in the SPDR Gold Trust, said in November that he personally wouldn't invest more money into his bullion fund because it's not clear when inflation will quicken.

“The concern is that the good economic news means the Fed will pull its taper off faster than people expect,” said Dan Denbow, a fund manager at the $950 million USAA Precious Metals & Minerals Fund. “What's going to drive gold higher would be more concerns about geopolitical risks, an inflation scare and just a lack of good news. We still don't see that happening.”

Bullish bets on crude oil slipped 7.1%, government data show. Prices climbed 1.8% last week. Stockpiles in the U.S., the biggest oil-consuming nation, reached 350.2 million barrels as of Jan. 10, the lowest since March 2012, Energy Information Administration data show.

Speculators pared their net-long position in copper by 27% to 25,664 contracts, the lowest since mid-December. Prices in New York capped the first weekly gain this year as signs of quickening economic growth boosted the outlook for demand. A supply surplus will shrink to 93,000 tons in 2015, from 167,000 tons this year, as gains in manufacturing boost consumption, Barclays analysts said in a report Jan. 13.

The World Bank lifted on Jan. 14 its forecast for 2014 global economic growth to 3.2%, from a June projection of 3%.

A measure of speculative positions across 11 agricultural products rose 35%, the most since August, the CFTC data show. Soybean holdings climbed 17%, the largest gain in nine weeks. Investors were less bearish on wheat, trimming their net-short position to 56,482 contracts, from 73,088 a week earlier, which was the biggest bet on a decline since the data begins in 2006.

(Bloomberg News)

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