Hedge funds exited gold at the fastest pace in more than four months on mounting speculation the Federal Reserve is getting closer to raising U.S. interest rates that have been near zero since 2008.
Money managers cut their net-long wagers for a sixth week, U.S. government data show. Investors sold 18.9 metric tons of bullion held through exchange-traded products last week, the biggest reduction since November.
Fed policy makers will meet this week, and key to their debate will be whether the U.S. economy has gained enough steam to warrant removing a pledge to be “patient” on raising borrowing costs in a statement scheduled for March 18. Gains in the labor market are increasing the chances the Fed will raise rates, eroding the haven appeal of gold and sending investors to assets with better yield prospects such as bonds and equities.
“The only thing you look at right now is if the Fed would say they’re no longer patient and ready to raise rates, then that would drive gold down,” Quincy Krosby, a market strategist at Prudential Financial Inc. in Newark, New Jersey, said by phone. “If you think the economy’s continuing to gain traction and momentum, that’s a net-negative for gold, because it does push the dollar higher.”
The net-long position in gold declined by 26 percent to 64,925 futures and options in the week ended March 10, according to U.S. Commodity Futures Trading Commission data published three days later. Long holdings dropped for a sixth week, the longest stretch since 2010.
Futures fell 1 percent to $1,152.40 an ounce last week on the Comex in New York. The Bloomberg Commodity Index of 22 raw materials declined 3.2 percent, reaching a 12-year low, as the MSCI All-Country World Index of equities slid 1.5 percent. The Bloomberg Dollar Spot Index rose 1.9 percent and on March 13 reached the highest since the data begins in 2004. Gold for April delivery rose 0.4 percent to $1,156.60 an ounce by 9:42 a.m. London time.
More than $4.3 billion has been wiped from the value of global ETPs backed by bullion in March, heading for the biggest monthly drop since September. Investors sold the metal, a traditional hedge against inflation, amid confidence that the Fed will lift benchmark rates fast enough to prevent consumer prices from accelerating as the economy rebounds.
Inflation expectations, measured by the five-year Treasury break-even rate, fell 26 percent in the past 12 months. Gold will post a third consecutive annual decline this year, according to Artur Passos, who produces the metals outlook at Itau Unibanco Holding SA and was the most accurate among 20 forecasters, data compiled by Bloomberg Rankings show.
Uneven U.S. expansion could prompt the Fed to wait longer before raising rates and revive the appeal of gold as a store of value. American retail sales in February unexpectedly dropped for a third consecutive month, Commerce Department data showed March 12. Bullion climbed 2.4 percent through the first two months of 2015 amid signs that slowing economies in Europe and Asia would be a drag on global growth.
Gold jumped 70 percent from December 2008 to June 2011 partly as the Fed held interest rates near a record low. Prices dropped 29 percent in the previous two years as the dollar and equities surged, while inflation remained low.
“If the economy turning weaker turns into something of a trend, then you’d find more people saying stocks are a little richer than they like, and they’d be looking for alternative assets, and that would be gold,” Alan Gayle, a senior strategist with RidgeWorth Investments, which has $44.5 billion under management, said by phone. “Maybe the Fed is giving up patience, but I’m not giving up patience.”
Net-bullish holdings across 18 U.S.-traded commodities slumped 35 percent to 228,942 contracts as of March 10, the CFTC data show. Investors cut their crude-oil wagers for a third consecutive week.
A measure of net-long positions across 11 agriculture commodities tumbled 70 percent to 38,414 contracts, the lowest since speculators were net-bearish in August 2013.
Money managers lowered their cotton holdings by 27 percent to 35,098 contracts, the first cut in six weeks. Futures in New York fell 3.9 percent last week, the most since November.
Chinese cotton consumption will be 1.4 percent smaller than estimated a month earlier, the U.S. Department of Agriculture said March 10. Slowing demand in China will drive world inventories to an all-time high in the season that ends in July.
American exporters have reported net-cancellations in two of the past four weeks, USDA data show. The U.S. is the world’s biggest shipper.
“There are relatively ample supplies for cotton around the world,” Christopher Narayanan, the head of agriculture research for Societe Generale SA in New York, said by phone.
“Throw in sluggish European Union growth, the Chinese economy slowing and U.S. export sales falling off pretty dramatically, and there’s really no shortage of bad news for cotton.”
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