Hedge fund gold position at six-month high after rally

Waning Faith

Gold’s rally probably will fade by the end of the year as the dollar strengthens, bond yields rise and investor faith in the metal as a store of value wanes, Morgan Stanley said in a report dated Aug. 22. Prices fell 17% this year, heading for the first annual decline since 2000.

“It’s hard to be bullish on gold when there is no inflation and the global economy is healing,” said John Stephenson, who helps oversee about C$2.7 billion ($2.6 billion) at First Asset Investment Management Inc. in Toronto.

The minutes of the Federal Open Market Committee policy meeting in July, released Aug. 21, said central bankers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves. The officials are scheduled to meet next in September.

Twelve analysts surveyed by Bloomberg expect gold to fall this week, eight were bullish and two neutral. That’s the highest proportion of bears since June 21, a week before prices plunged to $1,179.40, the lowest since August 2010.

ETP Holdings

Investors sold 684.64 metric tons of gold held in exchange- traded products this year, erasing $54.3 billion from the combined value of the funds. The decline may reach 700 tons in 2013, Barclays estimates.

As gold dropped into a bear market during the second quarter, billionaires George Soros and Daniel Loeb sold their entire investments in the SPDR Gold Trust, the largest ETP, filings to the U.S. Securities and Exchange Commission showed Aug. 14. Paulson & Co., the largest investor in the fund, cut its stake by 53%, the data show.

The slump in prices forced mining companies to announce at least $26 billion of writedowns in the past two months, and Toronto-based Barrick Gold Corp., the biggest producer, said Aug. 1 it may sell, close or curb output at 12 mines from Peru to Papua New Guinea.

Physical Demand

The drop in prices spurred a surge in demand for gold in Asia, helping bullion to rally for a second month. Sales of jewelry, coins and bars will reach as much as 1,000 tons in both India and China in 2013, valued at a combined $87.6 billion, the World Gold Council estimates. That would beat China’s 2011 record of 778.6 tons and be near India’s all-time high of 1,006.5 tons in 2010.

Bank of America Corp. predicts a fourth-quarter average of $1,495 and JPMorgan Chase & Co. anticipates rising averages in every quarter through the end of next year.

Money managers added $421 million to precious-metal funds in the week ended Aug. 21, the most in 33 weeks, according to Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Commodity funds had inflows of $583 million.

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