Speculators Lower Gold Bull Wagers on U.S. Rate Outlook

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Investors are exiting the gold market on speculation that signs of sustained U.S. economic growth will push the Federal Reserve closer to raising interest rates, cutting demand for bullion as an inflation hedge.

Hedge funds reduced their bullish gold bets for the third time in four weeks, and open interest in New York futures and options are near the lowest in five years, U.S. government data show. Prices tumbled 2 percent last week, the most since late May, erasing $1.2 billion from the value of exchange-traded products backed by bullion.

Gold has dropped 4.9 percent from 16-week high in mid-July on gains for U.S. housing and manufacturing. Federal Reserve Chair Janet Yellen said Aug. 22 that if economic progress “continues to be more rapid than anticipated,” an interest-rate increase could come sooner than currently expected. Bullion tumbled 28 percent last year as the central bank started reducing bond buying.

“Gold bugs are on the run, and we believe that prices will continue a long-term downward trend,” Chad Morganlander, a money manager at St. Louis-based Stifel, Nicolaus & Co., which oversees about $160 billion, said Aug. 21. “In quiet times, when the pendulum seems to be improving, or the global economy improves and news flow is bright, gold loses its bid immediately.”

Futures dropped 6.6 percent in the past 12 months to $1,280.20 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials fell 2.8 percent, while the MSCI All-Country World Index of equities climbed 16 percent.

The net-long position in gold declined 13 percent to 116,916 futures and options contracts, U.S. Commodity Futures Trading Commission data show. Short holdings betting on a drop jumped 17 percent to 24,442, while long wagers retreated 8.5 percent to 141,358, the biggest drop since March.

The aggregate number of gold futures and options contracts yet to be closed, liquidated or delivered dropped 1.2 percent to 574,443 contracts on Aug. 19, CFTC data show. Open interest reached 563,036 on Aug. 5, the lowest since September 2009.

Fewer Americans than forecast applied for unemployment benefits last week, while housing starts surged in July to the highest in eight months. Minutes of the July Fed policy meeting released Aug. 20 showed some officials “were increasingly uncomfortable” with the central bank’s forward guidance that calls for keeping its benchmark interest rate low for a “considerable time.”

Gold jumped 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs at an all-time low. The central bank reduced its monthly bond-buying program to $25 billion on July 30, making a sixth consecutive cut of $10 billion.

Bullion has rallied 6.5 percent in 2014, beating gains for broad measures of commodities, global equities and Treasuries. Investors returned to the metal as spreading violence in Eastern Europe and the Middle East boosted demand for a haven.

Sunni lawmakers last week quit talks on forming a new Iraqi government after gunmen killed scores of worshipers at a Sunni mosque in a province neighboring Baghdad, sending sectarian tensions soaring.

Holdings in global gold-backed ETPs climbed for 10 straight sessions through Aug. 22, the longest stretch since December 2012. The assets rose by 15.01 metric tons last month, the most since November 2012, even as New York futures declined 3 percent.

“The safe-haven aspects of gold demand particularly relate to the Middle East,” Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments Ltd., which oversees $333.6 billion, said Aug. 22. “Political risk remains high, but it’s stabilized at a high level.”

Debate on Rate Increase

U.S. labour markets remain hampered by the effects of the Great Recession and the Federal Reserve should move cautiously in determining when interest rates should rise, Fed Chair Janet Yellen said on Friday in a defence of her policy approach.

In a speech at a central banking conference here, Yellen laid out in detail why she feels the unemployment rate alone is inadequate to evaluate the strength of the U.S. job market.
The jobless rate has fallen faster than expected, but Yellen said the economic disruption of the last five years has left millions of workers sidelined, discouraged, or stuck in part time jobs — facts that are not captured in the unemployment rate alone.

Judging whether the economy is close to full employment is “complicated by ongoing shifts in the structure of the labour market and the possibility that the severe recession caused persistent changes in the labour market’s functioning,” Yellen said in the opening address at the Fed’s annual economic policy conference.

“Assessments of the degree of remaining slack in the labour market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve’s dual mandate” of stable prices and full employment, she added.

In such an environment “there is no simple recipe for appropriate policy,” Yellen said, arguing for a “pragmatic” approach that allows officials room to evaluate data as it arrives without committing to a preset policy path.

Yellen’s speech included lengthy references to the possibility that labour markets may in fact be tighter then they seem, and the Fed may be at risk of having to raise rates sooner and faster than expected.

But overall the remarks marked a defence of her basic premise that the 2007-2009 financial crisis and recession damaged the economy and work force in ways that are not fully understood.
The Fed has held benchmark rates near zero since December 2008, and has said it would wait a “considerable time” after winding down a stimulative bond-buying program in October before raising them. Financial markets currently expect rates to raise around the middle of next year.
The debate over Yellen’s evaluation of labour markets — and over when to raise borrowing costs — is intensifying within the Fed’s policy committee.

Some policymakers, including Kansas City Federal Reserve Bank President Esther George, the host of the annual conference in Jackson Hole, Wyoming, are becoming more vocal in their view that the Fed risks falling behind and should raise rates soon.

At the central bank’s last policy meeting in July, some officials argued against characterizing the amount of slack in the labour market as “significant,” which the Fed did do in its post-meeting statement. Many officials agreed that characterization may have to change soon.

Determining the degree of labour market slack has become the central debate at the U.S. central bank. Yellen wants to be sure employment has recovered as fully as possible before raising rates. Inflation “hawks” at the Fed, however, worry more months of near zero rates will cause inflation or possible asset bubbles.

Though the Fed debate has sharpened, there is no sense yet that the center is shifting towards a faster or earlier-than-expected rate increase. We let a little more time pass in order to have the evidence accumulate that we are on a solid track and we are likely to stay on that track. Atlanta Fed President Dennis Lockhart said

Soure: Bloomberg; Reuters