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Gold Outlook Splits Traders Weighing Stimulus Gains: Commodities

March 01, 2013

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Gold Outlook Splits Traders Weighing Stimulus Gains

Gold rose about 78 percent since the Federal Reserve began asset purchases in 2008. Photographer: Chris Ratcliffe/Bloomberg

Gold traders are divided on the outlook for prices, balancing central bank concern that more economic stimulus is needed against signs of recovering growth that spurred the longest run of monthly losses since 1997.

Fifteen analysts surveyed by Bloomberg expect prices to gain next week, while 14 were bearish and three were neutral. They were mostly negative the previous two weeks and evenly split the week before that. Bullion fell for a fifth straight month in February as investors sold the most metal ever from exchange-traded products, data compiled by Bloomberg show.

Gold rose about 78 percent since the Federal Reserve began asset purchases in 2008. Fed Chairman Ben S. Bernanke defended the $85 billion in monthly buying this week as a support for the economy and European Central Bank President Mario Draghi signaled stimulus will continue. Goldman Sachs Group Inc. said Feb. 25 bullion’s cycle has probably turned as the U.S. economy gathers momentum. Hedge funds are the least bullish on gold since 2008 and world equities set a four-year high last month.

“Confidence in a recovering U.S. economy as well as a strong global stock market has reduced the perceived need for gold,” said Adrian Day, who manages about $170 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. “We see this as a good level to be buying. There is no expectation of serious tightening in any major economy anytime soon.”

Gold Price

The metal fell 6.1 percent to $1,573.27 an ounce in London this year, after 12 straight annual gains, the best run in at least nine decades. It’s up 1.1 percent from a seven-month low of $1,555.55 set Feb. 21. The Standard & Poor’s GSCI gauge of 24 commodities slid 0.5 percent this year and the MSCI All-Country World Index of equities gained 4.1 percent. Treasuries lost 0.4 percent, a Bank of America Corp. index shows.

Investors sold 109.5 metric tons from ETPs last month, the most ever, according to Bloomberg data going back to 2003. While the 2,502.7 tons now held is the least in five months, it’s valued at $126.6 billion and is 4.9 percent below the Dec. 20 record. Billionaire investor George Soros cut his stake in the SPDR Gold Trust (GLD:US) by 55 percent in the fourth quarter as John Paulson, the largest investor in the biggest gold ETP, kept his holding unchanged, government filings showed last month.

Hedge Funds

Hedge funds cut their net-long position, or bets on higher prices, by 79 percent since October to 42,318 contracts in the week to Feb. 19, U.S. Commodity Futures Trading Commission data show. An unwind in the bull run has begun, Credit Suisse Group AG said in a Feb. 21 report. Goldman cut its three-month forecast to $1,615 from $1,825 and expects $1,550 in a year’s time. While gold should offer diversification, the “gold rush is over,” Societe Generale SA said yesterday.

U.S. purchases of new homes surged by the most in two decades in January and consumer confidence jumped last month, Feb. 26 data show. China’s economic growth accelerated for the first time in two years in the fourth quarter. The International Monetary Fund predicts global expansion will climb to 3.5 percent this year from 3.2 percent in 2012, even as it sees a second year of contraction in the euro area.

Gold generally earns returns only through price gains and some investors buy it as a hedge against inflation and currency declines. Minutes released Feb. 20 of the Fed’s latest meeting showed some policy makers said the central bank should be ready to vary the pace of its monthly bond purchases. The bond buying poses little risk of asset-price bubbles or inflation, Bernanke said Feb. 26 in Washington.

Stimulus Measures

Draghi signaled in Munich two days ago that the ECB has no intention of tightening monetary policy anytime soon. Bank of England Deputy Governor Charles Bean said Feb. 27 that policy makers were ready to add more monetary stimulus. Japanese Prime Minister Shinzo Abe has nominated a new central bank governor, raising the likelihood of further monetary stimulus this year.

Gold will still average a record $1,740 in the fourth quarter as quantitative easing weighs on the dollar and raises the outlook for faster inflation, according to BNP Paribas SA, which yesterday cut its 2013 outlook by 6.7 percent to $1,670. Inflation expectations measured by the break-even rate for five- year Treasury Inflation Protected Securities rose 11 percent this year and reached a four-month high on Feb. 6.

The metal is trading 18 percent below the record $1,921.15 set in September 2011 and this year’s drop took it below the 200-day moving average. Bullion’s 14-day relative strength index (MXWD) fell to 19.3 on Feb. 20, below the level of 30 that indicates to some analysts who study technical charts that a rebound may be imminent. That was the lowest since 1999, the year when gold fell to a 20-year low. The RSI was at 33.3 today.

Gold ‘Oversold’

“Sentiment is the worst we have seen it in recent years and therefore is due a bounce,” said Mark O’Byrne, the executive director of Dublin-based GoldCore Ltd., a brokerage that sells and stores bullion coins and bars. “Gold is oversold on a host of benchmarks.”

There are signs demand is improving. Physical buying from India, the biggest gold consumer, has been above-average “lately,” UBS AG said on Feb. 27. Average volumes this year on the Shanghai Gold Exchange’s benchmark contract have been more than double last year’s levels, data compiled by Bloomberg show. Indian and Chinese demand will rise at least 11 percent this year, the London-based World Gold Council said Feb. 14.

The U.S. Mint sold 80,500 ounces of American Eagle gold coins in February, data on its website show. While that’s less than the 150,000-ounce total in January, it’s 28 percent more than last year’s monthly average. Central banks added 534.6 tons to reserves last year, 17 percent more than in 2011, and will be “strong” buyers this year, the World Gold Council estimates.

Copper Survey

In other commodities, 18 of 27 traders and analysts surveyed expect copper to rise next week, seven were bearish and two were neutral. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, fell 2.7 percent to $7,713.50 a ton this year.

Twelve of 15 people surveyed expect raw sugar to gain next week and two predict a drop. The commodity slid 7.5 percent to 18.04 cents a pound on ICE Futures U.S. in New York this year.

Nineteen of 29 of those surveyed anticipate a rise in corn prices next week and eight said the grain will drop, while 15 said soybeans will advance and nine expect lower prices. Fifteen of 25 traders predicted higher wheat and seven were bearish. Corn added 1.4 percent to $7.08 a bushel this year in Chicago as soybeans rose 1.9 percent to $14.365 a bushel. Wheat is down 7.1 percent at $7.23 a bushel.

Commodity Prices

The S&P GSCI gauge of raw materials slipped 6.1 percent since reaching a four-month high on Feb. 13. Cotton, gasoline and natural gas are this year’s best performers in the index and wheat, sugar, cocoa and gold are the worst. Commodities will probably return about 6 percent in the next 12 months, Credit Suisse’s private banking unit said in a Feb. 27 report.

“The February sell-off in commodities seems to have been driven by markets running ahead of fundamentals,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Copenhagen. “Stimulus is having a smaller impact on commodities than previously. The real key is whether it will succeed in creating growth, which is ultimately what drives the physical demand for commodities.”

Gold survey results: Bullish: 15 Bearish: 14 Hold: 3
Copper survey results: Bullish: 18 Bearish: 7 Hold: 2
Corn survey results: Bullish: 19 Bearish: 8 Hold: 2
Soybean survey results: Bullish: 15 Bearish: 9 Hold: 5
Wheat survey results: Bullish: 15 Bearish: 7 Hold: 3
Raw sugar survey results: Bullish: 12 Bearish: 2 Hold: 1
White sugar survey results: Bullish: 12 Bearish: 1 Hold: 2
White sugar premium results: Widen: 6 Narrow: 7 Neutral: 2

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net


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