Hedge funds cut wagers on a gold rally to a five-year low as a record quarterly drop drove prices below $1,200 an ounce for the first time since 2010 and Goldman Sachs Group Inc. forecast more declines.
Money managers reduced their net-long position by 20% to 31,197 futures and options by June 25, U.S. Commodity Futures Trading Commission data show. That’s the lowest since June 2007. Holdings of short contracts climbed 5% to 77,027, the second-highest on record. Net-bullish wagers across 18 commodities tumbled 9%, the most in 12 weeks.
Gold’s 27% slump to the end of June, the worst first-half performance since 1981, erased $60.4 billion from the value of assets in exchange-traded products as investors cut holdings to a three-year low. The metal is poised to snap 12 consecutive annual gains. Banks from Goldman to Credit Suisse Group AG cut their gold forecasts last week after the Federal Reserve said it may taper stimulus as the economy improves.
“The things that supported gold have begun to crack,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC in Philadelphia, which manages about $58 billion of assets. “Worries about inflation have completely disappeared with the Fed talking about ending the easing at some point. As macroeconomic risks diminish, the stool from beneath gold prices has been pulled away.”
Gold futures dropped 23% last quarter, the most since Bloomberg data begins in 1975, and reached $1,179.40 on June 28, the lowest since August 2010. Traders are divided on the outlook for prices this week with 15 surveyed by Bloomberg expecting an advance. Fourteen were bearish and three neutral.
The Standard & Poor’s GSCI gauge of 24 commodities tumbled 6.7% last quarter, the most in a year. The MSCI All- Country World Index of equities slid 1.2%. The dollar rose 0.2% against a basket of six currencies. A Bank of America Corp. Index shows Treasuries lost 2.2%. Gold futures for August delivery rose 1.1% to $1,237.30 at 10:17 a.m. on the Comex in New York.
Goldman expects prices to drop to $1,050 by the end of next year, 17% less than its previous forecast of $1,270, the bank’s analysts said in a June 23 report. Declines will continue as the Fed trims its bond-buying program and investors sell ETP holdings, the bank said. Fed Chairman Ben S. Bernanke said June 19 the central bank will reduce its $85 billion in monthly asset purchases if the U.S. economy continues to improve.
Bullion’s declines are “shattering” investors’ confidence and the metal will probably fall to $1,150 in 12 months, Credit Suisse’s head of commodity research, Ric Deverell, said in a report June 25. Morgan Stanley lowered its 2014 outlook by 16% the same day, citing waning demand for haven assets. U.S. consumer sentiment held close to a six-year high in June, while economic confidence in the 17-nation euro area improved more than forecast, separate reports showed last week.
Even if the Fed slows asset buying, countries including Japan and China may continue to stimulate their economies, boosting demand for gold as a hedge against inflation, according to Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth Inc., which manages about C$100 billion ($95 billion) of assets.
Japan is making monthly bond purchases of more than 7 trillion yen ($70.6 billion). Bullion priced in yen reached the highest since March 1980 in April. The People’s Bank of China will work to maintain market stability, Governor Zhou Xiaochuan said June 28. The country’s benchmark money-market rate fell the most since 2011 that day. Bullion rose 38% since the end of 2008 as policy makers printed money on an unprecedented scale to boost growth.
“With all the easy money floating and some economies continuing to stimulate, we will see inflation, and gold will find favor at some point,” Murenbeeld said. “Gold is going through a mid-cycle correction, but the fundamentals for higher prices remain intact.”
Money managers pulled $2 billion from gold funds in the week ended June 26, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $2.68 billion, according to EPFR.
Bullish bets on crude fell 11% to 232,194 contracts, the biggest drop since February, CFTC data show. Platinum holdings slumped to the lowest since August as prices fell for a fifth straight month, the longest slide since 2001. Palladium wagers dropped the most in 11 weeks. The metal tumbled 12% in June.
Investors increased their net-short position in copper to 32,599 contracts, from 29,018 a week earlier, CFTC data show. Prices fell 7.1% in June, the most in 13 months. Goldman cut its outlook for the metal saying slowing economic growth in China will crimp consumption. Supplies will outpace demand through 2016, the bank said in a June 25 report.
A measure of net-long positions across 11 agricultural products gained 5.9% to 313,428 futures and options. The S&P’s Agriculture Index of eight commodities plunged 10% last month, the most since September 2011.
Bullish corn positions dropped 5% to 70,701 contracts, the fourth consecutive decline and the longest slump since January. Prices reached a 32-month low on June 28. Soybean holdings reached the lowest in four weeks. U.S. farmers will plant more grain than forecast and the largest oilseed crop on record, the government said June 28.
Planting of corn, the biggest domestic crop, jumped to 97.379 million acres, the most since 1936, the U.S. Department of Agriculture estimates. Analysts in a Bloomberg survey expected 95.431 million. Wheat acreage reached a four-year high of 56.53 million and soybeans were sown on a record 77.728 million acres.
“A slowdown in China, coupled with rising supplies does, not augur well for commodities,” said Jeff Sica, who helps oversee more than $1 billion as the president of Sica Wealth Management in Morristown, New Jersey. “We are in an era of lower commodity prices.”