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Hedge funds have never been this pessimistic about gold.
Money managers are making their biggest-ever bet that prices will decline. That comes on the heels of five straight weeks of losses for bullion futures, the longest stretch in more than a year. Investors are exiting gold on multiple fronts as holdings in exchange-traded funds drop along with open interest for futures.
The negative bullion news has been building as US equities and the dollar extend gains, curbing demand for alternative assets. At the same time, a humming American economy signals that the Federal Reserve will likely keep raising interest rates. “Higher interest rates are anathema to gold because gold doesn’t pay interest,” said Donald Selkin, a New York-based chief market strategist at Newbridge Securities Corp., which oversees about $2 billion (Dh7.34 billion).
Holdings in SPDR Gold Shares, which account for about a third of assets in bullion-backed ETFs, last week shrank to the smallest since early 2016. The ETF has seen about $1.96 billion in outflows this year. Assets by metric tons in all bullion-backed ETFs tracked by Bloomberg have shrunk to the smallest since February.
One of the biggest drags on the gold market has been the stability of the US economy. Even as Donald Trump escalates tensions with major trading partners, growth is buzzing along and taking the stock market for a ride. As a result, bullion is trading near its lowest relative to S&P 500 Index futures since the global financial crisis.
“Gold is always pitched as an alternative to stock market collapses,” Selkin said. “But stocks have been going up for nine straight years of a bull market, so people say ‘Why do I need this as an alternative asset?’”
Investors are setting up for more declines. In the week ended August 7, money managers expanded their net-short position, or the difference between bets on a price increase and wagers on a decline, by 54 per cent to 63,282 futures and options, according to US Commodity Futures Trading Commission data released three days later. That’s the biggest bearish bet since the data begins in 2006.
The move came as short holdings increased 11 per cent to the highest ever, while long bets fell almost 5 per cent. Undervalued?
Gold’s skid could be leading investors to undervalue the commodity, according to RBC Capital Markets. Investors’ “tolerance” for economic uncertainty is rising, and at some point that risk may come back to bite them, which will be the metal’s time to shine, analyst Helima Croft wrote in an August 9 note. “The question remains, how long can gold remain fundamentally undervalued?” Croft said. “We think it could persist, but that upside risk to prices remains.”
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