Inside Financial Markets

Hedge funds rapidly exit gold amid Fed outlook

fed meetingHedge funds rapidly exit gold amid Fed outlook

Hedge funds exited gold at the fastest pace in more than four months on mounting speculation the Federal Reserve is getting closer to raising US interest rates that have been near zero since 2008.

Money managers cut their net-long wagers for a sixth week, US government data show. Investors sold 18.9 metric tons of bullion held through exchange-traded products last week, the biggest reduction since November.

Fed policymakers will meet this week, and key to their debate will be whether the US economy has gained enough steam to warrant removing a pledge to be “patient” on raising borrowing costs in a statement scheduled for Wednesday. 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. “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 US Commodity Futures Trading Commission data published three days later. Long holdings dropped for a sixth week, the longest stretch since 2010.

ETP losses

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 index began in 2004. Gold for April delivery rose 0.5 percent to $1,158.20 an ounce at 10:40 am Beijing 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 US 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

Sanie Khan

Sanie Khan holds a deep knowledge of the financial markets in Pakistan. Based in Karachi, he has over 20 years of hands-on management experience in financial technologies and managing operations in the financial sector. He was the General Manager at the Pakistan Stock Exchange (PSX) for 17 years. He along-with senior members of Exchange

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)