Hedge funds increased their bets on a gold rally, just before prices fell for a second week as an accelerating U.S. economy outweighed concern that violence between Russia and Ukraine will escalate.
Money managers increased their net-long position by 3.1 percent in the week through July 22, U.S. government data show. Two days later, prices dropped to a five-week low amid declining demand. Purchases by China, the world’s biggest user, fell 19 percent in the first six months of the year.
Gold futures are headed for a July decline after rallying 10 percent in the first half of the year, a gain that outpaced broad measures of commodities, equities and treasuries. While buying was fueled by tensions in Ukraine and the Middle East, signs of U.S. growth reduced the appeal of bullion as an alternative asset. Americans filing for unemployment insurance payments held near an eight-year low in the week ended July 19, and consumer sentiment was at a three-month high.
“People bought gold because of fear but once that passes, the premium diminishes,” James Shelton, who helps oversee $2.2 billion as chief investment officer of Kanaly Trust Co. in Houston, said July 24. “As we will see the economy strengthening further, we expect the drop to accelerate.”
Futures are down 1 percent since the end of June to $1,309.10 an ounce in New York, after dropping 0.4 percent last week. The Bloomberg Spot Commodity Index of 22 raw materials was little changed last week, halting a four-week slide, while the MSCI All-Country World Index of equities climbed 0.4 percent. The Bloomberg Treasury Bond Index rose 0.1 percent.
The net-long position in gold rose to 136,120 futures and options contracts as of July 22, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop declined 19 percent to 21,112 contracts.
The precious metal’s appeal to investors is waning. Open interest on the Comex fell to the lowest in a month last week, and trading dropped 52 percent since touching an 11-month high in May, exchange data show.
Sales of gold coins at the U.S. Mint, the world’s largest, are heading for the worst month since March. Holdings in global exchange-traded funds backed by the metal fell by 2.3 tons last week, or 0.1 percent, the first drop in five weeks.
In 2013, bullion tumbled 28 percent, the most in three decades, as a stronger U.S. economy and the prospect of less monetary stimulus curbed demand for alternative assets.
The Federal Reserve has trimmed its monthly bond-buying program to $35 billion, after five straight cuts of $10 billion each since November. Fed officials will announce their next policy decision at the end of a two-day meeting on July 30.
Gold bulls who have raised their net-long position in six of the past seven weeks still see a risk of inflation, which could revive the metal.
Fed Chair Janet Yellen on July 2 affirmed U.S. borrowing costs will remain low, boosting demand for the metal as an alternative investment. Consumer prices rose 2.1 percent in the 12 months from June, rebounding from a rate of 1.1 percent in February, government data showed last week.
While inflation may not pick up “radically in the next month,” it has bottomed and will rise over the next few years, according to Patricia Mohr, a market specialist at Scotiabank Group in Toronto. She said gold will average “a little over” $1,300 this year.
Tension in Ukraine and violence in the Gaza strip boosted demand for the metal as a haven. The downing of Malaysian Air Flight MH17 over eastern Ukraine this month has dashed at least temporarily any chances of de-escalating the struggle between the rebels and the government. In the Middle East, the conflict has left more than 800 Palestinians and 35 Israeli soldiers dead since it escalated on July 8.