Hedge funds bet gold gain to fizzle

[NEW YORK] Hedge funds are betting that gold's recent rally won't last and are holding the biggest wager ever that prices will decline.

The net-long position in gold dropped by 9.9 per cent to 31,653 futures and options in the week ended March 24, according to U.S. Commodity Futures Trading Commission data published three days later.

That was the lowest since Dec 2013. Short holdings rose for a seventh straight week to 84,022 contracts, the highest since the data begins in 2006.

Even as futures climbed for two straight weeks, some investors have shied away from the metal. Global holdings in exchange-traded products backed by bullion declined every week in March. The dollar is headed for the longest run of monthly advances since at least 1967 against a basket of six currencies, lowering demand for gold as an alternative investment.

"Most of the hedge funds are relying on dollar strength as being the primary determining factor in decreasing positions," Jeff Sica, who oversees US$1.5 billion as president and chief executive officer of Circle Squared Alternative Investments in Morristown, New Jersey, said by telephone March 27. "As long as we see dollar strength, you're going to see the hedge funds get progressively less bullish."

Gold futures rose 4.2 per cent in the two weeks through March 27 to US$1,200.70 an ounce on the Comex in New York. Prices are headed for the first quarterly gain since June.

The metal has rebounded from this year's low of US$1,141.60 on March 17 after Federal Reserve officials the next day cut their outlook for where interest rates will increase to by the end of the year.

Atlanta Fed President Dennis Lockhart said March 26 he still favors raising borrowing costs from mid-year onward despite some softer readings on economic growth. The benchmark federal funds rate has been kept near zero since Dec 2008.

Gold dropped 29 per cent in the previous two years as the dollar surged and inflation remained low. Prices climbed 70 per cent from Dec 2008 to June 2011 partly as the Fed held rates near a record low.

BLOOMBERG