Hedge funds cut bets on a rally in gold by the most since 2007 and became the most bearish ever on sugar and coffee as concern that the Federal Reserve will slow U.S. stimulus programs drove prices for raw materials to the biggest loss this year.
Money managers and other large speculators reduced their net-long position in gold futures and options by 40% in the week ended Feb. 19 to 42,318, the biggest drop since July 31, 2007, U.S. Commodity Futures Trading Commission data show. Wagers across 18 U.S. raw materials tumbled to the lowest since December 2011 as investors’ net-short positions for sugar and coffee hit record highs. Bullish corn wagers fell the most since June 2010.
Global holdings of exchange-traded products backed by gold tumbled 1.6% last week, the most since August 2011, after minutes of a Fed policy meeting showed several officials said the central bank should be ready to vary the pace of their monthly bond purchases. The Standard & Poor’s GSCI Spot Index of 24 commodities sank 2.6%, the most since Dec. 7. The gauge surged 85% in the four years through Dec. 31 as the Fed expanded its balance sheet to more than $3 trillion.
“The expectations and rhetoric out of the Fed about an exit strategy has spooked people, making them think the Fed is going to tighten stimulus,” James Dailey, who manages $215 million at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania, said in a telephone interview. “There’s a confluence of weak gold owners, and people who don’t have a strong conviction about owning gold.”
The GSCI Index has dropped 2.2% in February, heading for the biggest monthly loss since October. The MSCI All-Country World Index of equities climbed 0.1%, while the dollar advanced 2.7% against a basket of six trading partners. Treasuries rose 0.2%, a Bank of America Corp. index shows.
Many Fed policymakers “expressed some concerns about potential costs and risks arising from further asset purchases,” according to the minutes of the latest Federal Open Market Committee meeting released Feb. 20. The central bank is purchasing $85 billion a month in debt, putting it on track to expand its record $3.08 trillion balance sheet by $1.02 trillion this year.
Fed Governor Jerome Powell said Feb. 22 the central bank could revise its plan to eventually sell the securities acquired during its large-scale asset purchases, both to avoid causing financial instability and taking losses on its sales. Fed Governor Jeremy Stein said this month some credit markets, including leveraged loans and junk bonds, show signs of potentially excessive risk-taking. In 2007, the central bank held less than $900 billion in assets.