Gold bulls can't shake Fed woes as US$2.6b wiped from ETPs

SEP 15, 201512:22 AM

[NEW YORK] Gold bulls can't shake the specter of higher US interest rates as Federal Reserve policy makers gather this week.

Prices are trading near a one-month low, investors are dumping holdings through exchange-traded products, and the metal's volatility is rebounding. A resilient US job market and dollar strength are adding to gold's woes, spurring money managers to cut their bets on a rally by more than a third.

More than US$2.6 billion was wiped from the value of gold ETPs in the past three weeks as investors awaited the central bank meeting. While Fed-fund futures show lowered expectations for monetary tightening this week, traders are still pricing in more than a 50 per cent chance for a rate increase by the end of the year. Higher borrowing costs reduce bullion's allure because it doesn't pay interest, unlike competing assets such as bonds.

"The likelihood is the Fed moves this year, and for now a tighter Fed and stronger dollar are both keeping a lid on gold," said Rob Haworth, a senior investment strategist in Seattle at US Bank Wealth Management, which oversees US$127 billion. "When I look at the gold market, that's the biggest overriding factor."

Futures added 0.4 per cent to $1,108.10 an ounce as of 12 p.m. on the Comex in New York. Prices slid 1.6 per cent last week. The MSCI All-Country World Index of equities gained 1.9 per cent, while the Bloomberg Dollar Spot Index slid 0.8 per cent.

Speculators cut their net-long position by 36 per cent to 28,286 futures and options in the week ended Sept. 8, according to US Commodity Futures Trading Commission data published three days later. Bearish wagers climbed 18 per cent to 87,815 contracts, the first gain since July 21.

A divergence between gains for the US economy and cooling growth in Asia and Europe means the Bloomberg Dollar Spot Index is heading for a third year of increases, the longest streak since data for the measure begin in 2004. Gold often moves inversely to the greenback and is poised for a third straight annual loss. BNP Paribas SA said gold will continue to fall against the backdrop of a strengthening dollar. The bank sees prices reaching $925 by the third quarter of 2016, according to a Sept 10 report.

It's been a tough two years for investors in gold, which first fell into a bear market in April 2013. More than US$54 billion has been wiped since then from the value of global ETPs, or securities that are physically backed by bullion and linked to the price of the metal. Gains in the US job market are showing that the economy is strong enough to withstand higher interest rates and cutting demand for the metal as a haven. For the last six months, first-time unemployment claims have been below the 300,000 level that economists associate with a healthy labor market.

Holdings in bullion ETPs fell 4.4 metric tons last week to 1,517.3 tons. The assets reached 1,508.2 tons on Aug. 11, the lowest since 2009.

"Things aren't bad enough to require gold as the end-of- the-world safe haven," said Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments who oversees US$393.1 billion.

While the US central bank is looking to raise rates, monetary policy is still loose in other parts of the world, boosting the metal's appeal as a store of value. China's currency devaluation last month came as policy makers there place more emphasis on combating the deepest economic slowdown since 1990. European Central Bank President Mario Draghi signaled this month that he may expand stimulus.

Gold surged 70 per cent from December 2008 to June 2011 as central banks increased money supply on an unprecedented scale, spurring concern that inflation would quicken. The metal tumbled has tumbled more than 40 per cent from a record $1,923.70 reached in 2011.

"There's going to be a significant opportunity with prices down here, because I think with all this currency devaluation people are going to run to gold eventually," said Jeffrey Sica, who oversees US$1.5 billion as the president of Circle Squared Alternative Investments in Morristown, New Jersey.

BLOOMBERG