Investors Bail As Gold Drops Most In 32 Years

Bloomberg

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Hedge funds got less bullish on gold for the seventh time in eight weeks as the U.S. economy strengthens and inflation fails to accelerate, driving prices to the biggest annual drop in more than three decades.

The net-long position in gold fell 12 percent to 28,702 futures and options in the week ended Dec. 24, U.S. Commodity Futures Trading Commission data show. Short holdings gained 1.1 percent to 76,052, a three-week high. Net-bullish holdings across 18 U.S.-traded commodities climbed 4.5 percent to 768,354 contracts as copper wagers gained to a 34-month high.

Investors shunned gold in 2013, halting 12 straight years of price gains. Global equities rallied on improving growth prospects and inflation failed to accelerate, eroding demand for bullion as a preserver of wealth. Assets in exchange-traded products backed by bullion fell to the lowest since 2009 as holders including billionaires George Soros and John Paulson sold. The International Monetary Fund signaled this month the U.S. economy will expand more than forecast.

"Gold is something we avoid," said Michael Shaoul, the chief executive officer of Marketfield Asset Management LLC, which oversees about $17 billion. "The developed economies are growing, and equities remain very interesting, so there is really no reason to be in gold."

Futures in New York retreated 29 percent this year to $1,186.50 an ounce, poised for the first loss since 2000 and the biggest since 1981. The Standard & Poor's GSCI gauge of 24 commodities slid 2.1 percent, while the MSCI All-Country World index of equities advanced 20 percent. The Bloomberg Dollar Index, a gauge against 10 major trading partners, rose 3.4 percent. The Bloomberg Treasury Bond Index fell 3.2 percent.

Record Outflows

Investors pulled $38.6 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, a day after the Federal Reserve cut the pace of its monthly bond purchases to $75 billion from $85 billion, easing concern that inflation would accelerate. U.S. consumer prices were unchanged in November after a 0.1 percent drop the prior month, according to Dec. 17 data from the Labor Department.

Prices are "likely to grind lower" through 2014, Jeffrey Currie, the head of commodities research at Goldman Sachs Group Inc. in New York, said in a telephone interview Dec. 19. The metal will reach $1,050 by the end of 2014, the bank said in a Nov. 20 report. The Fed will probably cut its bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to a Bloomberg survey of economists conducted on Dec. 19.

The improving economic growth that's prompted investors to flock to equities may eventually bring more inflation and revive demand for bullion, according to Jim Russell, who helps oversee $113 billion as a Cincinnati-based senior equity-strategist for U.S. Bank Wealth Management.

Inflation expectations as measured by the break-even rate for five-year Treasury Inflation Protected Securities climbed 1.7 percent in December, snapping two months of declines. Policy makers may hold interest rates near zero percent even if unemployment falls below the 6.5 percent rate the central bank previously cited as a likely catalyst for an increase, the Fed said in its Dec. 18 statement.

Gold surged more than 500 percent in the 12 straight years of gains through 2012 as the dollar weakened. The rally accelerated from December 2008 to June 2011 as the Fed expanded its balance sheet through debt purchases and held borrowing costs at a record low in a bid to revive growth amid a U.S. recession. Bullion reached a record $1,923.70 in September 2011.

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