Gold Bull Bets Reach Seven-Week High Before Retreat: Commodities

Hedge funds increased wagers on a gold rally to the highest in seven weeks before a report showing the U.S. added more jobs than forecast spurred the biggest retreat in prices since April.

Speculators raised their net-long position by 19 percent to 57,113 futures and options by June 4, U.S. Commodity Futures Trading Commission data show. The holdings surged 60 percent in two weeks, the most since March, as short bets contracted. Net-bullish wagers across 18 U.S.-traded commodities slid 3.3 percent as investors became more bearish on sugar and coffee.

U.S. payrolls rose 175,000 in May, signaling companies are optimistic about the outlook for demand, the government said June 7. The report increased speculation the Federal Reserve will taper its bond buying. Gold holdings in exchange-traded products dropped 19 percent to a two-year low since the start of January as some investors lost faith in the metal as a store of value and as equities rose and inflation failed to accelerate.

"We saw some short-term bullish sentiment build up, then the jobs data dashed all hopes of gold rising," said Walter "Bucky" Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. "Any good news for the economy is not so good for gold. The debate about when the Fed will taper or end stimulus continues to pressure."

Biggest Loss

Gold futures dropped 2.3 percent on June 7, the most since April 15, when the metal capped a two-day, 13 percent loss that was the biggest in three decades and sent prices into a bear market. Bullion rose 1.6 percent in the four days prior to the jobs report, before ending the week down 0.7 percent at $1,383 an ounce. Gold futures traded at $1,378.20 an ounce by 4:51 a.m. in New York today, 28 percent below the record reached in September 2011.

The Standard & Poor's GSCI Spot Index of 24 commodities rose 2.5 percent last week, while the UBS Bloomberg CMCI gauge of 27 raw materials advanced 1 percent. The MSCI All-Country World Index of equities slid 0.4 percent and the dollar weakened 2 percent against six major trading partners. Treasuries lost 0.1 percent, a Bank of America Corp. index shows.

Bullion fell 18 percent since the end of December, the worst start to a year since 1981. Federal Reserve Bank of Dallas President Richard Fisher said June 4 the central bank should reduce its $85 billion in monthly asset purchases amid signs of a recovery in the housing market. Fed Bank of Kansas City President Esther George urged a slowdown of the stimulus program in a speech the same day, and Alan Greenspan, who led the central bank from 1987 to 2006, said on CNBC television June 7 the Fed should move toward ending the asset purchases.

Hedge Funds

The number of hedge funds investing in bullion dropped to the lowest since 2010 and assets slumped 31 percent this year to $22.2 billion on losses and redemptions, according to Farhan Mumtaz, an analyst at EurekaHedge Pte Ltd., the Singapore-based fund-research company. Taurus Funds Management Pty Ltd. shut its precious-metals fund because of investor redemptions after prices fell, Gordon Galt, a principal at the Sydney-based fund manager, said June 5. Withdrawals from global gold ETPs helped erase $46.7 billion from the value of the assets in 2013, wiping out the gains of the previous two years.

Last month's gains in employment may not be sufficient proof of improvement for Fed policy makers, who have pledged to hold the benchmark interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn't exceed 2.5 percent. The jobless rate was 7.6 percent in May.

200,000 Jobs

Fed Chairman Ben S. Bernanke needs to see four months of job growth averaging at least 200,000 to justify reducing the pace of asset purchases, according to Vincent Reinhart, a former director of the Fed's Division of Monetary Affairs. Bill Gross, manager of the world's biggest bond fund, said June 7 the central bank is unlikely to reduce its asset purchases. Bullion surged 56 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth.

Gold traders are the most bullish since before the bear market began two months ago with 19 analysts surveyed by Bloomberg expecting prices to rise this week. Eight were bearish and six neutral. That's the largest proportion of bulls since March 22. This year's price slump has spurred a surge in demand for coins and jewelry, with the U.S. Mint saying June 5 that its sales may be a record this year.

'Numeric Obsession'

"The unemployment rate has been the single-most significant number that the Fed has been looking at, and that went up, so there is really no reason for the market to be worried," said Jeff Sica, who helps oversee more than $1 billion as the president of Sica Wealth Management. "The Fed's numeric obsession makes gold attractive as the bond-buying program and monetary debasement will continue."

Commodity assets under management fell to $385 billion in April from $412 billion in March, Barclays Plc said June 7. The decline was paced by outflows from precious metals, the bank said. Gold may fall toward $1,000 by 2015, Nouriel Roubini, professor of economics and international business at New York University, said June 1.

Investors pulled $1.23 billion from gold funds in the week ended June 5, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.68 billion, according to EPFR.

Crude Oil

Wagers on a rally in crude oil dropped 2.5 percent to 212,127 contracts, a second straight reduction, the CFTC data show. Investors trimmed their bets on a decline for copper to 6,626 from 8,872 a week earlier. The funds have been bearish on the metal since February and also have short positions in coffee, sugar, soybean oil, wheat and ultra-low-sulfur diesel.

The funds boosted their bearish position in coffee to 22,842 contracts from 20,991 a week earlier. Prices dropped for four straight weeks, the longest slump since February. Supplies of unroasted beans from Brazil, the top shipper, rose 22 percent in May from a year earlier.

The S&P GSCI lagged behind the MSCI All-Country World Index for six months, the longest stretch since 1998. Goldman Sachs Group Inc. and Citigroup Inc. are predicting the end of the decade-long bull market as prices that more than doubled spurred expansions at mines, farms and oil fields.

A measure of net-long positions across 11 agricultural products climbed 3.4 percent to 303,672 futures and options. The S&P Agriculture Index of eight commodities declined 6.8 percent this year.

"There's a lot of excess capacity, so commodity prices are reflecting that," said Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York. "Inflation is very, very low, and commodities represent inflationary expectations to a great extent. For sure, the bull run is over."