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Greed and Capitalism
What kind of society isn't structured on greed? The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.
- Milton Friedman
Tuesday, October 27, 2015
Hedge Funds Are Getting Their Gold Bets Wrong
Gold
prices are befuddling hedge funds, which are posting a track record no
better than a coin flip when it comes to betting on the metal.
The
funds and other money managers have placed wrong-way wagers on gold in
five of the past nine weeks, U.S. government data show. Last week,
speculators increased their net-bullish position to the highest since
February just before the biggest price drop since August. The precious
metal has fluctuated between year-to-date gains and losses more than a
dozen times in 2015 as traders weigh a dimming global economic outlook
against the prospect for higher U.S. borrowing costs.
While few
investors expect the Federal Reserve to raise interest rates when
officials meet this week, more than half anticipate an increase within
the next six months, trimming gold’s longer-term appeal. In contrast,
China cut its benchmark lending rate last week, and Mario Draghi signaled
the European Central Bank may add fresh stimulus measures this year.
Gold loses out when monetary policy tightens because the metal doesn’t
offer interest or pay dividends, unlike competing assets.
“Gold
has been in a broad trading range,” said Michael Cuggino, the San
Francisco-based president and portfolio manager at Permanent Portfolio
Family of Funds Inc., which oversees about $4 billion. “It remains there
and continues to trade off of central bank expectations and lack of
inflationary pressure. It trends up, it trends down. From a trading
perspective, there’s no compelling reason either to buy it or sell it at
the moment.”
Futures fell 1.7 percent to $1,162.80 an ounce on
the Comex last week, the biggest drop since Aug. 28, and settled at
$1,166.20 on Monday. Speculators boosted their gold net-long position by
48 percent to 121,804 futures and options contracts as of Oct. 20,
according to Commodity Futures Trading Commission data released three
days later. Long holdings rose for a fifth straight week, the most since
January.
Goldman Sachs Group Inc. remains bearish, with analysts saying in a report dated Oct. 21 that they expect
the Fed to act in December, with additional rate increases expected
through 2016. The bank forecasts the metal will fall to $1,100 in three
months and $1,000 in a year. Prices are heading for a third straight
annual drop, the worst performance since 1998, as low inflation and a
stronger dollar cut the appeal of the metal as a store of value.
“Gold
just doesn’t have the sponsor it used to have, whether that be people
that were buying it as a store of wealth during a particularly difficult
period like we saw during the financial crisis, or whether that be
significant central-bank buying, or even on the supply side,” Fiona
Boal, director of commodity research at Fulcrum Asset Management in
London, which oversees $3.6 billion, said in a telephone interview.
Gold
bulls are betting that weaker global economies will diminish the
outlook for U.S. growth and force Fed officials to keep interest rates
near a record low for longer. Traders are now pricing in a 36 percent
chance that rates will rise in December, down from about 50 percent just
two months ago. The metal surged 70 percent from December 2008 through
June 2011 as the U.S. central bank fanned inflation fears by purchasing
debt and holding borrowing costs near zero percent in a bid to shore up
growth.
The
number of funds with long positions in the metal jumped 26 percent to
98 as of Oct. 20, the CFTC data show. That’s the highest since November
2012. Holdings in exchange-traded products backed by bullion rose five
times in the past six weeks.
“I’m definitely leaning more
bullish,” Adrian Day, president of Adrian Day Asset Management in
Annapolis, Maryland, which oversees $145 million, said in a telephone
interview. “The Fed has repeatedly suggested or indicated that rates are
coming soon and that hasn’t happened. I think the market is just
beginning to say that this is the boy that’s cried wolf and it’s not
going to happen.”
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