By Debarati Roy and Megan Durisin
Goldman Sachs Group Inc. and Societe General SA can thank Janet Yellen for helping to get their bearish forecasts for gold back on track.
After hedge funds piled into the precious metal this year with the most bullish bets in 16 months, defying the predictions of lower prices by Goldman and SocGen, gold tumbled last week by the most since November as Federal Reserve Chair Yellen said economic stimulus could end this year, with interest rates starting to rise in early 2015.
Bullion, which slid last year by the most since 1981 as some investors lost faith in the metal as a store of value, rebounded 9.1 percent in 2014 as the global expansion faltered and tensions escalated in Ukraine. Those bullish influences are “transient,” and the U.S. economy will recover from a weather- driven slowdown, pushing gold lower, Goldman’s Jeffrey Currie reiterated in a March 20 report.
“The sentiment probably had gotten a little ahead of itself,” said Ted Harper, who helps manage more than $9 billion at Frost Investment Advisors LLC in Houston. “Gold is going to be somewhat problematic from an investment standpoint over the next six to 12 months. We’re probably looking to a relatively higher and quicker increase on rates, which is a headwind for precious metals.”
Weekly Decline
Gold (COMEX:GCJ14) futures in New York declined 3.1 percent last week to $1,336 an ounce, while the Standard & Poor’s GSCI Spot Index of 24 raw materials fell 0.5 percent. The MSCI All-Country World index of equities rose 0.7 percent, while the Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 0.6 percent. The Bloomberg Treasury Bond Index fell 0.5 percent.
The net-bullish position in gold rose 13 percent to 138,429 futures and options in the week ended March 18, the most since November 2012, U.S. Commodity Futures Trading Commission data show. Short holdings fell for a fifth week, the longest streak in three years.
Investor holdings in exchange-traded products backed by bullion posted the first weekly decline in four last week. On March 19, the Fed cut its monthly bond purchases by $10 billion to $55 billion. Yellen said the asset buying could end this fall and benchmark interest rates could rise about six months later. Gold jumped 70 percent from December 2008 to June 2011 as the Fed pumped more than $2 trillion into the financial system and held borrowing costs near zero percent to boost the economy.
“We continue to believe that the economic momentum in the U.S. shows further improvement,” said Michael Haigh, the New York-based head of commodities research at SocGen who correctly predicted the 2013 bullion rout. “We reiterate our very bearish outlook for this year. Prices could drop below $1,000. I would not rule that out.”
SocGen, Goldman
Haigh’s outlook for a decline echoes Goldman’s Currie, who on April 10 issued a sell recommendation, before gold plunged 13 percent in a two-session drop that ended April 15 and left prices in a bear market. Currie said this month that the chances are increasing the metal will drop below $1,000.
“The only thing that would make us rethink our thesis would be a significant reassessment of U.S. economic-growth prospects for the second half of this year,” Currie said in an e-mailed response to questions from Bloomberg News.
Prices reached a six-month high of $1,392.60 on March 17 as President Vladimir Putin’s bid to annex the Crimea region of Ukraine spurred the biggest standoff between the West and Russia since the Cold War. While the tension has calmed, “any kind of flare up will definitely bring back some people to gold,” said James Paulsen, chief investment strategist at Wells Capital Management, which manages about $360 billion.
Inflation Expectations
For the first time in 19 months, investors are stepping up their buying of exchange-traded funds that hold Treasuries tied to cost-of-living increases, data compiled by Bloomberg show. On March 7, inflation expectations over the next five years reached the highest level since May on signs of wage growth. The price- outlook measure is still down almost 20 percent from a year ago.
“We have gold as an inflation hedge,” said Adam Strauss, Chicago-based co-manager of the $300 million Appleseed Fund at Pekin Singer Strauss Asset Management Inc. “Some of the inflation forces have dissipated significantly over the last 12 months. That has not changed at all our long-term outlook.”
Bullion jumped more than 500 percent in the 12 straight years of gains through 2012, reaching a record $1,923.70 in September 2011. Prices fell into a bear market in April partly as a rally in U.S. equities cut demand for haven assets. The Standard & Poor’s 500 Index reached a record last week.
Record Wagers
Combined net-wagers across 18 U.S.-traded commodities climbed 1.2 percent to 1.71 million contracts, the most since the data begins in June 2006, the CFTC data show. Holdings climbed for a 10th week, the longest streak on record.
Investors added $562.7 million into U.S.-based ETFs tracking commodities in the five days through March 20, data compiled by Bloomberg show. Precious metals saw an inflow of $555.3 million, while $24 million was pulled from energy funds.
Bullish bets on crude oil fell 7.9 percent to 302,320 contracts, dropping for a second straight week. West Texas Intermediate gained 0.6 percent in New York last week, the first gain this month, as the U.S. announced more sanctions on Russia, the world’s biggest energy exporter.
Speculators increased net-short bets in copper to 21,965 from last week’s 10,473 contracts. Futures in New York fell to a 44-month low on March 19. Stockpiles tracked by the Shanghai Futures Exchange jumped 67 percent this year.
Agriculture Holdings
A measure of speculative positions across 11 agricultural products rose 6.7 percent to 1.06 million contracts, the highest since February 2011. Investors more than doubled their wheat net-long holding to 24,036, the most bullish since October.
Wheat in Chicago is heading for the biggest monthly gain since July 2012 and prices reached a 10-month high last week. Cold, dry weather has reduced the outlook for winter crops in the U.S., the world’s biggest exporter, just as a rail backlog delays supplies from Canada. Farmers in Ukraine, on pace to be the sixth-largest shipper, have cut grain sales to “very minimum” levels amid currency declines, according to UkrAgroConsult, a research company in Kiev.
“There are opportunities in some specific commodities, rather than in the entire asset class,” said Sameer Samana, the St. Louis-based international strategist at Wells Fargo Advisors LLC. His firm oversees about $1.3 trillion. “In agriculture, weather conditions have a big role to play. For gold, prices will move lower with talk about the rate hike.”
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