Hedge funds win world-beating rally with record gold holdings

[NEW YORK] Unlike most of the world, gold investors got it right when it came time to betting on the Brexit vote. They were rewarded with a world-beating rally.

Hedge funds boosted their bets on price gains for bullion to an all-time high just two days before UK voters took to the polls and decided to leave the European Union, sending global markets roiling. Gold futures climbed to a two-year high after the referendum. The metal's wild ride isn't over yet. Prices could jump another 7 per cent by the end of the year, a Bloomberg survey showed.

Gold's surge shows the metal is delivering on its role as a refuge, with prices on Friday posting the biggest increase of any major global asset. The gains added to what's already been a stellar 2016 for bullion. Futures are heading for the best start to a year since 1979.

Speculation that the Federal Reserve will keep US interest rates low has boosted demand for the metal as a store of value, while a volatile geopolitical backdrop has increased haven buying.

The UK vote "is a fundamental change, and we could see the fallout go on for quite a while," said Adrian Day, president of Adrian Day Asset Management in Annapolis, Maryland, which oversees US$165 million. "There's a lot of uncertainty and conflict there, and uncertainty and conflict are good for gold."

RECORD HOLDINGS

Money managers boosted their net-long position in gold futures and options by 6.7 per cent to 256,898 contracts in the week ended June 21, according to US Commodity Futures Trading Commission data released three days later. That's the highest since the data begins in 2006. The previous record was 253,653 reached in August 2011 - just a month before gold futures touched US$1,923.70, the highest ever.

In New York, futures advanced 0.6 per cent to US$1,330.50 on the Comex at 12.50pm Singapore time, extending last week's 2.1 per cent increase. The metal climbed as much as 7.9 per cent on Friday, topping the gains of other major haven assets including the yen and Treasuries.

Most global equity markets tumbled as many investors were stunned by the results of the British vote, which sparked panic on trading floors and prompted UK Prime Minister David Cameron to resign.

Prices could reach as high as US$1,424 by the end of the year, according to the median of 12 forecasts in a Bloomberg survey of analysts and traders from New York to London conducted on Friday. That would be the highest since August 2013.

The precious metal has long been prized as a universal store of value immune to the whims of political leaders. The UK Royal Mint, which makes circulation and collector coins, and specialist online brokers reported surges in new customers after the Brexit vote. In London's spot gold market, the biggest in the world, prices jumped as much as 8.1 per cent, the most since the height of the global financial crisis in 2008.

OPTIONS SOAR

Investors were also quick to snap up options contracts in New York betting on further price gains. On Friday, the most- traded gold option on the Comex was a call giving owners the right to buy the metal at US$1,350 by July, exchange data show. The contract, which expires Monday, more than doubled in price. The August US$1,350 call more than tripled.

Money has been pouring into gold all year amid increasing expectations that a volatile global growth environment will force Fed officials to hold off from raising US interest rates. Holdings in exchange-traded products backed by the metal climbed to the highest since October 2013 last week. The SPDR Gold Shares alone attracted US$10.8 billion in new money this year, the most of more than 6,000 ETPs tracked by Bloomberg.

Gold's gains in 2016 come after three straight annual losses when low inflation, a stronger dollar and an improving US job market spurred some investors to lose faith in the metal as a store of value.

The recent jump higher could be a "selling opportunity," if the greenback continues to strengthen, said Sameer Samana, a St Louis-based global quantitative strategist at Wells Fargo Investment Institute, which oversees US$1.8 trillion. The dollar rose as much as 0.7 per cent against a 10-currency basket on Monday.

But, bullion and the dollar climbed together in 2008 amid the global recession. Speculation that the world economy will sputter has spurred traders to cut the odds of a US rate increase by December to 15 per cent. That's down from 78 per cent just a month ago.

"Global growth, negative interest rates and the fear trade: that's what drives gold the most," said Frank Holmes, who oversees US$800 million as chief executive officer of US Global Investors in San Antonio, Texas.

BLOOMBERG