Gold bets cut to five-year low

Hedge funds are the least bullish on gold in more than five years as speculation about the pace of money printing by central banks whipsawed prices, driving volatility to a 17-month high.

Money managers cut their net-long position by 9 percent to 35,686 futures and options as of May 21, the lowest since July 2007, U.S. Commodity Futures Trading Commission data show. Holdings of short contracts rose 6.7 percent to a record 79,416. Net-bullish wagers across 18 U.S.-traded commodities slid 2.1 percent, as investors became more bearish on coffee and wheat.

Gold’s 60-day historical volatility touched the highest since December 2011 last week and a gauge of price swings for the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, surged 73 percent this year. Bullion see-sawed as Federal Reserve Chairman Ben S. Bernanke testified before Congress on May 22. Two days later, Bank of Japan Governor Haruhiko Kuroda said he’s done enough to spur growth.

“Gold has so many drivers that it leads to a lot of getting pushed around by one thing or another,” said Dan Denbow, a fund manager at the $1 billion USAA Precious Metals & Minerals Fund in San Antonio. “It makes it impossible to determine a direction.”

Futures dropped 5.4 percent in May, poised for a second monthly decline. The Standard & Poor’s GSCI Spot Index of 24 commodities fell 0.1 percent and the MSCI All-Country World of equities also declined 0.1 percent. A Bank of America Corp. Index shows Treasuries lost 1.3 percent.

Increasing price swings have made gold the fourth-most volatile commodity in the GSCI index since March 29, data compiled by Bloomberg show. Silver topped the ranking for raw materials tracked by S&P, followed by natural gas and corn. Investors sold 467 metric tons of gold through exchange-traded products this year, contributing to $45.3 billion of value being erased from global holdings, as some lost faith in the metal as a store of wealth.

Futures traded in New York rose 0.4 percent as of 6:01 a.m. after earlier slipping as much as 0.3 percent.

Gold rose as much as 2.6 percent and dropped as much as 1.8 percent on May 22, the day Bernanke told Congress that raising interest rates or curbing bond buying too soon would endanger the recovery, while also saying the bank may slow its asset purchases if there are signs of sustained economic growth. Kuroda said May 24 the Bank of Japan had announced enough monetary easing and would implement flexible money-market operations.

Volatility in gold prices will be temporary and investors will return to buy the metal as a hedge against inflation, said Nic Johnson, who helps manage $30 billion of commodity assets at Pacific Investment Management Co. in Newport Beach, California.

While price swings increased this quarter, gold was the third-least volatile commodity in the past five years. Cattle and feeder cattle were the most stable and natural gas and crude oil had the most variations. Bullion surged 57 percent since the end of 2008 as central banks printed money on an unprecedented scale to boost growth.

The U.S. Mint sold 209,500 ounces of gold coins last month, the most since December 2009. Central banks may buy as much as 550 tons this year after adding 534.6 tons in 2012, according to the London-based World Gold Council. Twelve analysts surveyed by Bloomberg expect prices to rise this week, with nine bearish and eight neutral, the highest proportion of bulls since April 26.

“Gold is a diversifying element to people’s portfolios,” Johnson said. “The liquidation is more institutional in nature, so I think investors very much view gold in the same light as they did before. Volatility will decline back to historic levels.”

Money managers pulled $1.57 billion from gold funds in the week ended May 22, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Total outflows from commodity funds were $1.89 billion, according to EPFR.

Investor sentiment is “negative towards gold,” and physical demand has started to slow, Suki Cooper, a New York- based analyst at Barclays Plc, said in a May 24 report. The metal will get “crushed” and trade at $1,100 in a year and below $1,000 in five years as inflation fails to accelerate, Ric Deverell, the head of commodities research at Credit Suisse Group AG, said in London on May 16.

Bets on a rally for crude oil climbed for a fourth week to 231,794 futures and options, the highest since March 2012, the CFTC data show. Investors are holding a silver net-short position of 187 contracts from a net-long holding of 1,413 a week earlier. Bullish platinum wagers fell 17 percent to 19,713, the biggest drop since February.

China’s manufacturing is contracting in May for the first time in seven months. A Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics released May 23 showed a preliminary reading of 49.6 for May, below the level of 50 separating growth and contraction and missing analyst estimates.

A measure of net-long positions across 11 agricultural products slumped 15 percent to 228,870 contracts, the first drop in six weeks. Speculators held a coffee net-short position of 11,695 contracts, compared with 172 a week earlier. Wagers on a decline for wheat expanded to 40,447 from 17,225. Bullish corn holdings fell for the first time in four weeks.

Coffee prices tumbled 7 percent last week, the most since July. Inventories monitored by ICE Futures U.S. soared 79 percent in 12 months. Farmers will harvest the biggest grain and soybean crops ever this year as U.S. fields recover from last season’s drought that was the worst since the 1930s, the U.S. Department of Agriculture estimates.

“I would be underweight the commodities at this point until we start seeing a pickup in global growth and a self- sustaining recovery here in the U.S.,” Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $130 billion. “The global economy has been decelerating, and China is struggling.”


Incredibly Important Developments In Many Key Markets

Today King World News is reporting on incredibly important developments taking place in key markets, including gold and silver. Acclaimed commodity trader Dan Norcini spoke with KWN about the amazing action in gold, silver, oil, stocks and provided a remarkable silver chart. Below is what Norcini had to say in his interview.

Norcini has been stunningly accurate in his predictions of the movement in the gold and silver markets. Now the acclaimed trader discusses these incredibly important developments in key markets: “Yesterday was one of those days in which the Chairman of the US Federal Reserve made a point of saying everything he needed to say in order to cover all of the bases. No matter who was listening they were sure to hear what they wanted.

He had to let the market know that the Fed was mindful of not pulling the plug on the QE program too soon. He chose those words to start his talk. The effect was immediate – the precious metals markets roared to life and stock markets shot to yet another all-time high. Even crude oil did its upward levitation act by surging higher on those initial comments….

“Then it was time for Bernanke to reassure all of those currency traders out there that unlike the Bank of Japan, which was debasing its currency, the Fed was mindful of the impact a money creation scheme of this magnitude would have, and would taper back the bond buying program gradually, as soon as economic data warranted. Down went the gold and silver markets, along with many of the other commodity markets.

If that wasn’t enough, when the FOMC minutes were released later in the day, the metals markets, and even the equity markets, were sucker-punched by what those minutes revealed. It showed definite talk about scaling back the QE, but it also showed a strong disagreement among the various members as to what constituted economic data strong enough to warrant such. The markets did not care one whit about that – all they saw at an initial glance was more discussion about ending the funny money program and they chose to focus on that.

My take on this is shaped out of watching the games these master manipulators have learned to play with the markets. In summary, this is everything that was communicated: “We will scale back the QE when we think the economy is strong enough to no longer need it in a full dose.” Who among us learned anything new from that statement? This is the same dance that the Fed has been feeding the markets for many months now.

It just goes to show that everyone with a functioning brain how utterly phony the stock market rally is and how dependent it is on the cocaine being force fed into it to sustain itself. If the Fed spooks the equity markets into seriously believing that they are going to pull the plug on the QE program, what we saw yesterday afternoon with that violent downside selling wave that temporarily engulfed the stock market will look like a mini rehearsal for a massive waterfall decline.

This is why Bernanke chose to start off his speech in a soothing fashion. He and the rest of the FOMC governors knew they had a tiger by the tail and if they let go, there is going to be serious trouble. Take a look at the 15 minute silver chart if you want to see how ‘mere words’ alone can produce such insanely irrational price action:

Stocks Remind Me Of Gold And They Could See A ‘Quick And Painful Adjustment

The S&P 500 ended the week at yet another all-time record high.

Some have tried to compare the current peak to the stock market tops we’ve seen in 2000 and 2007.

However, many — like Reformed Broker Josh Brown — are quick to remind everyone that the comparisons stop with nominal price. Relative to earnings, stocks are clearly much more reasonably priced than they were before the last two market crashes.

This is not to say that there aren’t things we should worry about.

“I am troubled to see that forward earnings has been stuck around its record high of $115 for the past nine weeks,” wrote market guru Ed Yardeni earlier this week. “This is the measure of earnings that I believe drives the market.”

Indeed, this earnings growth stagnation amid rising stock prices have caused valuations to become less attractive.

In a piece for Itaú BBA titled “Developing Euphoria,” hedge fund manager Felix Zulauf raises similar concerns. Interestingly, he draws comparisons between the stock market and the gold market. Here’s an excerpt (emphasis added):

The problem with currently rising equity markets is not rising prices but the lack of fundamental improvement. Stock prices are driven primarily by this lack of alternative investment opportunities and the growing belief that central banks’ money printing can and will generate attractive investment returns for equity investors for a long time despite the lack of supporting fundamentals in the real economy. That is a risky assumption, but as long as rising trends remain intact, nobody worries. In fact, the momentum of the leading equity market indices (Japan, the U.S., Germany and Switzerland to name some) is very powerful and has the potential to carry further, potentially even into a buying climax. Similarities to the gold price in spring 2011 come to mind. At that time, the conviction that gold could only go one way because inflation will eventually rise was as extreme as is now the case for equities.

Once equity markets discover the emperor has no clothes, they could face a quick and painful adjustment to bring markets in line again with fundamentals. For the gold market it was when investors realized there was no rise in CPI inflation or the assumption that systemic risks are declining. It is true that equities look attractive relative to fixed-income alternatives from a valuation point of view, when depressed fixed-income yields are compared to dividend yields or earnings yields (reciprocal of P/E ratios). Those comparisons are all fine as long as economies do not fall back into a recession and earnings stay at least stable. As investors are not expecting a recession, they still believe equities are by far the best place to be, and they act accordingly. That’s why we might see an end to this cycle with a bang (buying climax) and not a whimper (conventional broadening cycle top).