Funds cut gold positions as Paulson’s loss widens

Asset Purchases

Fed Chairman Ben S. Bernanke said last month the central bank could curtail its bond purchases if the U.S. employment outlook shows a sustainable improvement. Policy makers will trim purchases to $65 billion a month in October, the median of 59 economist estimates compiled by Bloomberg this month shows.

Gold traders turned bearish for the first time in a month, with 18 analysts surveyed by Bloomberg anticipating declining prices this week. Fourteen were bullish and four neutral, the largest proportion of bears since May 17.

Assets in global exchange-traded products backed by bullion fell 20% this year as some investors lost faith in the metal as store of value. U.S. consumer prices climbed 1.1% in the 12 months through April, according to a measure watched by the Fed that excludes food and fuel. That matches the smallest increase since records began in 1960. The World Bank raised its 2013 U.S. growth forecast to 2% on June 12, from a January prediction of 1.9%.

Paulson & Co.

Paulson & Co. said it has no intention of closing down its Gold Fund even after this year’s losses, according to a letter to investors obtained by Bloomberg News. The company recommended investors stay invested as valuations provide “significant upside.” Paulson is the biggest investor in the SPDR Gold Trust, the largest bullion ETP.

St. Louis Fed President James Bullard said June 10 that inflation below the central bank’s 2% target may warrant prolonging bond buying. The International Monetary Fund sees the Fed maintaining large monthly bond purchases until at least the end of this year and urged the central bank to carefully manage its exit plan to avoid disrupting financial markets in its annual assessment of the U.S. economy released June 14.

“If quantitative easing does continue for too long, that could certainly lead to inflation,” said Christopher Burton, a fund manager at Credit Suisse Asset Management in New York who helps oversee $10.8 billion in commodity related assets. That “would generally correspond to higher commodity prices,” he said.

Total outflows from commodity funds were $315 million in the week ended June 12, according to Ian Wilson, a managing director for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Investors withdrew $277 million from gold funds, according to EPFR.

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