With Gold prices stuck in 'purgatory', hedge funds pull out

New York - Gold is in the doldrums. Prices have fallen for six straight weeks, the worst streak in a year, as prospects for higher US borrowing costs damped demand for gold, a for non-interest-bearing asset.

 Investors don’t seem too optimistic about the outlook for 2017. Hedge funds cut their bets on a rally to the lowest since February, while outflows are ramping up from exchange-traded funds.

After the metal’s best first half since 1979, bullion has been losing its lustre as US equities rallied to records. A stronger dollar and rising bond yields have also crimped demand for the alternative asset.

Federal Reserve officials last week signalled a steeper path for interest rates in 2017, after raising borrowing costs for the first time this year. While money managers have cut their wagers on a gold rally for five consecutive weeks, their net-position is still more than double what it was at the end of January.

"People are still too optimistic on gold," said John LaForge, the Sarasota, Florida-based head of real assets strategy at Wells Fargo Investment Institute.

"We’re in a price purgatory for a lot of commodities, including gold. You’re going to have a lot of investors and strategists like myself reduce their price forecasts."

Bull wagers

The net-long position, or bets on price gains, for gold declined 15% to 68 905 futures and options contracts in the week ended December 13, according to US Commodity Futures Trading Commission data released three days later.

The holdings are down 61% over the five-week slump.

On the Comex in New York, gold futures rose 0.3% to $1 140.90 an ounce on Monday, after a 2.1% loss last week. Prices touched $1 124.30 on December 15, the lowest since February.

Earlier this year, bullish sentiment for gold was partly driven by political uncertainty as Britain voted to exit the European Union and amid a heated US election cycle.

Just before Americans took to the polls on November 8, gold was trading near a one-month high. Since then, prices have slumped about 11% as there’s been relative calm in the election aftermath and as equities rallied on president-elect Donald Trump’s pro-business policies.

Investors are positioning for more stability. In the month through December 15, they pulled $6.2bn from ETFs tracking precious metals - the largest withdrawal across asset classes, data compiled by Bloomberg show.

The biggest casualty was SPDR Gold Shares, the top fund backed by bullion. Holdings in global gold ETFs dropped for 26 straight sessions through Friday, the longest slide since 2013.

While assets in the gold ETFs are still up for the year, Goldman Sachs Group estimates that the “vast bulk” of the holdings are losing money at current prices, analysts said in a Nov.

21 note. If investors were to withdraw from even half of those money-losing holdings, it would spark a $60 sell-off in prices, the bank said.

China, India

Even the physical market doesn’t look promising. China in November refrained from adding to its gold reserves for the first time in six months, according to People’s Bank of China data compiled by Bloomberg.

Imports to India are down 43% in the first 11 months of the year compared with 2015, provisional ministry data compiled by Bloomberg show. The countries are the world’s top bullion buyers.

Still, political uncertainty remains, and that could spark a rebound in gold. Trump’s presidency carries a lot of unknowns, including how his trade policies could impact the US economy.

European Central Bank President Mario Draghi has warned that the combination of rising global interest rates and explosive politics could expose the area’s economy to weakness, and Swiss National Bank policy makers last week cited structural problems in a number of advanced economies that could "negatively affect the outlook."

"We are starting to see people say, well perhaps gold is a contrarian buy because political risks haven’t gone away," said Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments, which oversees $360bn.