Hedge funds most bullish on gold rally in 14 months

Hedge funds raised bullish gold wagers to the highest in more than 14 months amid mounting concern that the US economic recovery is weakening.

The net-long position climbed 25 per cent to 113,911 futures and options in the week ended February 25, the highest since December 2012, US Commodity Futures Trading Commission data show. Net-bullish holdings across 18 US-traded commodities advanced 16 per cent to 1.45 million contracts, the most since April 2011. Coffee wagers reached a 33-month high.

Investors' return to gold after the bear market in 2013 drove prices 6.6 per cent higher last month, the most since July. The US economy grew at a slower pace in the fourth quarter than previously estimated, giving the expansion less momentum heading into 2014. China's yuan tumbled the most on record on February 28, adding to concern about emerging-market growth and spurring demand for alternative assets.

"There are some major concerns about the erosion of the US economy," said Jeffrey Sica, who helps oversee more than $1 billion of assets as president of Sica Wealth Management in Morristown, New Jersey. "The devaluation of currencies will continue, and it's going to further accelerate the upside appreciation of gold. As we see more trouble out of China and emerging markets, it's going to become more of a safe-haven investment than it's been in the past year and a half."

Futures climbed 9.9 per cent to $1,321.60 an ounce in New York this year. The Standard & Poor's GSCI gauge of 24 raw materials advanced 2.7 per cent and the MSCI All-Country World Index of equities added 0.4 per cent. The Bloomberg Dollar Spot Index, a gauge against 10 major trading partners, fell 0.3 per cent. The Bloomberg Treasury Bond Index rose two per cent.

Home sales
US pending home sales in January rose less than forecast, private figures showed February 28. The Labor Department said a day earlier that initial jobless claims increased by 14,000 to 348,000 in the week ended February 22, exceeding all economist forecasts in a Bloomberg survey. Assets in the SPDR Gold Trust, the biggest bullion-backed exchange-traded product, climbed last month by the most since September 2012.

Gold's 60-day historical volatility reached 16.75 on February 27, the lowest since April, when the metal fell into a bear market. The declines come after prices were whipsawed in 2013, driving some investors to lose their faith in the metal as a store of value. In July, the 60-day measure touched the highest since April 2009. Open interest, or the number of contracts outstanding on the Comex, gained 4.3 per cent in February, snapping three months of declines.

Physical demand
Purchases of coins, jewellery and bars, which helped fuel this year's rally, are starting to slow amid the price gains. China's gold imports from Hong Kong fell to 83.6 tonnes in January from 91.9 tonnes in December, according to data from the Hong Kong Census and Statistics Department February 25. Gold-coin sales by the US Mint dropped 66 per cent in February from a month earlier to 31,000 ounces, the lowest since September.

Federal Reserve Chair Janet Yellen said February 27 the bank will likely keep trimming asset purchases as policy makers monitor economic data to determine if the recent weakness is temporary. The Fed cut monthly bond buying by $10 billion in the past two meetings, leaving purchases at $65 billion. Gold jumped 70 per cent from December 2008 to June 2011 as the central bank bought debt.

Prices plunged 28 per cent last year, the most since 1981. Gold held in global ETPs tumbled 33 per cent in 2013, and the value of the assets dropped $73.4 billion. Goldman Sachs Group Inc. sees the metal dropping to $1,050 by the end of the year.

'Take profits'
"Once we begin to see the US economy gain momentum, then you will see the dollar strengthen and gold quickly give back gains," said Paul Christopher, the St Louis-based chief international strategist at Wells Fargo Advisors, which manages $1.4 trillion. "Our advice to investors is, use this rebound in gold to take profits and move the money elsewhere."

Investors turned bullish on copper for the first time in a month, with the net-long position reaching 1,459 contracts as of February 25, compared with a net-short holding of 8,888 a week earlier, the CFTC data show.