Gold bears return as ETP rout extends to 17th week

June 14, 2013 05:46 AM

Gold traders turned bearish for the first time in a month as investors reduced holdings in exchange-traded products for an unprecedented 17th consecutive week and India, the biggest buyer, announced curbs on imports.

Eighteen analysts surveyed by Bloomberg expect prices to fall next week, with 14 bullish and four neutral, the largest proportion of bears since May 17. Investors sold 497.2 metric tons valued at about $22 billion through ETPs since Feb. 8 and the 2,117.96 tons left is the least they have held since March 2011, data compiled by Bloomberg show.

Bullion is on track for the first annual drop since 2000 as some investors lose faith in it as a store of value. While the slump into a bear market in April hurt billionaire hedge fund manager John Paulson and producer Newcrest Mining Ltd., it spurred purchases of coins and jewelry worldwide. That demand may be threatened in India after the nation raised gold import taxes to contain a record current-account deficit.

“Sentiment is very bleak,” said Andrey Kryuchenkov, a commodity strategist in London at VTB Capital, a unit of Russia’s second-largest lender. “The Indian import tax hike is concerning and it’s obviously not helping sentiment. Investors are basically on the sidelines. They don’t want to do anything and are still spooked.”

Gold Price

The metal fell 17% this year to $1,389.93 an ounce and is trading 28% below the record $1,921.15 set in September 2011. The Standard & Poor’s GSCI gauge of 24 commodities dropped 2.2% since January started and the MSCI All-Country World Index of equities rose 7.3%. Treasuries lost 1.4%, a Bank of America Corp. index shows.

India raised the import duty to 8% from 6% on June 5 and the central bank also further restricted shipments. Overseas purchases slid to an average of $36 million a day in the 14 business days through June 7, compared with an average $135 million a day in the 13 days through May 20, Raghuram Rajan, chief economic adviser in the Finance Ministry, said June 11. The All India Gems & Jewellery Trade Association has asked the government for a discussion on reversing the tax increase.

The move to slow demand comes amid the worst drop in ETP holdings since the first product was listed in 2003. Assets fell for 17 weeks through June 7 and are down 17.9 tons so far this week. Paulson, the largest investor in the SPDR Gold Trust, the biggest ETP, had a 13% loss in his Gold Fund last month. That takes the decline since the start of the year to 54%, according to a copy of a letter to investors obtained by Bloomberg News.

Write Down

Gold’s plunge is also hurting producers already contending with rising costs. Newcrest, Australia’s largest gold producer, said last week it will write down the value of its assets by as much as A$6 billion ($5.9 billion) after the slump. The 30- member Philadelphia Stock Exchange Gold and Silver Index slid 37% this year.

Data released last week showed U.S. payrolls increased more than forecast in May and Federal Reserve Chairman Ben S. Bernanke said last month that the central bank could curtail its $85 billion monthly bond purchases if the economy improves. The World Bank raised its 2013 U.S. growth forecast on June 12 to 2%, from 1.9% in January, even as it cut its estimate for the global economy to 2.2%, from 2.4%.

U.S. Stimulus

Bullion rose 58% since 2008 as the Fed led a global surge in money printing to boost growth. While the U.S. central bank will slow purchases, it will still buy $65 billion a month by October, the median of 59 economist estimates compiled by Bloomberg this month shows. The Bank of Japan restated its April pledge this week to increase the monetary base by 60 trillion to 70 trillion yen ($742 billion) a year, and refrained from adding extra policy tools to counter bond-market volatility.

“Global fundamentals, including accommodative monetary policy, remain positive for gold,” said Adrian Day, who manages about $135 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. “The market is slowly realizing that despite all the talk about tapering of bond buying by the Fed, there will be no meaningful global tightening any time soon.”

The surge in equities over the past three quarters, which also damped demand for gold, is now partially reversing. The MSCI All-Country World Index reached a seven-week low yesterday. The U.S. Dollar Index, a measure against six currencies, slipped to the weakest in almost four months.

Money Managers

Hedge funds and other large speculators got more positive in the past two weeks after reducing bullish bets to the lowest in almost six years, U.S. Commodity Futures Trading Commission data show. They increased their net-long position by 60% to 57,113 contracts in the two weeks to June 4.

There are still signs that lower prices are boosting physical buying. The U.K.’s Royal Mint, which saw its gold-coin sales triple in April, said last week the “steep increase” in demand continued in the past several weeks. The U.S. Mint predicted last week that its gold and silver coin sales may reach a record in 2013, and the Austrian Mint said it expects “quite good business” in the next couple of months.

Gold’s 60-day historical volatility reached 28.9% today, the highest since December 2011, data compiled by Bloomberg show. That compares with an average of 20.6% in the past five years.

In other commodities, six of 11 people surveyed expect raw sugar to drop next week and two were neutral. The commodity slid 14% to 16.85 cents a pound on ICE Futures U.S. in New York this year.

Grain Costs

Eighteen of 30 surveyed anticipate lower corn prices and nine said the grain will gain, while 14 of 29 said soybeans will rise and 13 expect lower prices. Eighteen traders predicted declines in wheat and seven were bullish. Corn fell 24% to $5.305 a bushel this year in Chicago. The December contract, which reflects supply after the U.S. harvest, is down 12% this year. Soybeans lost 8.3% to $12.92 a bushel, as wheat declined 13% to $6.7925 a bushel.

Seven traders and analysts surveyed expect copper to fall next week, six were bullish and five were neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, slipped 11% to $7,098.25 a ton this year.

‘Death Bells’

Citigroup Inc. said in May that this year will probably signal “death bells” for the commodities super cycle, or longer-than-average period of rising prices. Societe Generale SA wrote in a June 12 report that it’s too early to call a near- term end to the super cycle because of expanding populations with more disposable income and greater urbanization.

The Washington-based World Bank cut China’s growth outlook to 7.7%, from 8.4% previously. The nation is the biggest user of everything from copper to cotton to coal. Metals and grains are among the worst-performing commodities this year.

“Our call has been for a bottoming in commodities prices in the second-quarter,” said Bjarne Schieldrop, the Oslo-based chief commodity analyst at SEB AB. “The reduced growth outlook by the World Bank is shaking that confidence a little.”

Gold survey results: Bullish: 14 Bearish: 18 Hold: 4
Copper survey results: Bullish: 6 Bearish: 7 Hold: 5
Corn survey results: Bullish: 9 Bearish: 18 Hold: 3
Soybean survey results: Bullish: 14 Bearish: 13 Hold: 2
Wheat survey results: Bullish: 7 Bearish: 18 Hold: 2
Raw sugar survey results: Bullish: 3 Bearish: 6 Hold: 2
White sugar survey results: Bullish: 4 Bearish: 5 Hold: 2
White sugar premium results: Widen: 2 Narrow: 1 Neutral: 8

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