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Funds dump gold at fastest pace since May as Fed outlook shifts

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With the Fed's next policy meeting looming this week, hedge funds are exiting from gold.

[NEW YORK] Gold investors seem to agree: Don't fight the Federal Reserve.

With the Fed's next policy meeting looming this week, hedge funds are exiting from gold. Speculators cut their bets on a bullion rally by the most in more than three months. Holdings in global exchange-traded funds backed by the metal are down from a three-year high in August and heading for the biggest monthly decline this year.

Aggregate open interest in New York futures is mired in the longest slump since May.

Speculation is mounting that Fed officials, in a statement scheduled for release on Sept. 21, will signal that higher US interest rates are on the way. That's bad news for gold, which thrives as an alternative asset. Through Friday, the metal had surged 24 per cent for the year as the policy makers declined to raise borrowing costs.

The Fed is "going to have to eventually raise rates and acknowledge that inflationary pressures have been rising," Quincy Krosby, a market strategist at Prudential Financial Inc, which oversees about US$1.3 trillion, said in a telephone interview.

"Certainly, you want to take some profit" from gold investments before that happens, she said.

The net-long position in gold futures and options fell 11 per cent to 248,858 contracts for the week ended Sept 13, the biggest decline since the week ended May 24, according to Commodity Futures Trading Commission data released three days later. A week earlier the holdings were 278,994, the highest since July 5.

Futures traded in New York fell 1.8 per cent last week to US$1,310.20 an ounce on Friday. The metal has dropped 0.8 per cent since the end of June. Gold surged 25 per cent in the first half of the year as economic woes in Europe and Asia sparked optimism that the Fed would be slow to raise US interest rates amid global uncertainty.

Since then, an improving US economy has put the brakes on the metal's momentum.

The cost of living in the US rose more than projected in August and moved closer to the central bank's goal, Labor Department figures showed Friday. At the same time, the dollar has climbed in three of the previous four weeks. Gold prices declined for three straight years through 2015 as the greenback advanced.

Last month, Fed chair Janet Yellen said the case for a rate hike "has strengthened," and vice chairman Stanley Fischer said that inflation is "within hailing distance" of the Fed's target.

Since then, yields for Treasuries have climbed. Cohen & Steers Capital Management, which oversees US$61 billion in assets, this month pared its gold allocation, Ben Ross, a portfolio manager at the firm, said last week, citing the 10-year Treasury yield.

Global holdings of bullion through ETPs fell 5.2 metric tons last week to 2,014.6 tons, the second drop in three weeks, data compiled by Bloomberg show. Assets in SPDR Gold Shares, the biggest fund backed by the metal, are on pace for a second straight monthly decline.

Open interest in gold futures traded in New York dropped for six straight sessions through Thursday, the latest data compiled by Bloomberg show. That's the longest streak since the end of May.

Hope for gold bulls could come from an unlikely place: the US election. Americans will head to the polls on Nov 8 to elect a new president. The non-partisan Fed may want to avoid any conflict by waiting to take action on monetary policy until after the vote is over.

"With the election, they don't want to get involved in politics, and this is the last meeting before then," said Donald Selkin, the chief market strategist at National Securities Corp in New York, who helps manage about US$3 billion.

"But in case they do raise rates this week, that would knock down the case for gold."

BLOOMBERG