Grexit: Hedge Funds move back into bullion, gold price jumps most in six months

As you can see below, the longer-term graph of the gold price is ugly. Down a full third in the last two years, bullion failed to react to any of its normal stimuli from inflationary fears around Quantitative Easing through to geopolitical concerns sparked by Russia’s invasion of Ukraine. But “Grexit”, the possible departure of Greece from the EU, seems to be doing what the more obvious news events could not. The gold price jumped overnight, posting its best gains in half a year. And with professionals climbing back into bullion, the extended gold price slide may be coming to an end. – AH   
By Lydia Mulvany

(Bloomberg) — Hedge funds are stepping back onto the gold bandwagon as political turmoil in Greece and government actions in Asia helped send prices to their biggest monthly advance since June.

Bullish wagers on the metal increased for the first time in three weeks and have more than doubled since mid-November, U.S. government data show. Short holdings dropped for the sixth week in seven. Bullion rose for a second straight month in December.

While cheap oil has kept inflation in check, gold’s appeal as an alternative asset got a boost as Greek opposition to austerity measures that may prompt the country’s exit from the euro area. China has lowered interest rates and waived some bank lending requirements to help spur growth, while Japan expanded stimulus measures. Bullion prices are up 6.6 percent since touching a four-year low in early November.

Gold had its best run since June, but this three year price graph shows there's a lot of recovery needed.
The gold price enjoyed its best run since June, but a three year price graph shows there’s more recovery required.

“People are running to gold because it’s the last haven after the dollar,” said George Gero, a New York-based precious metals strategist who helps manage $500 million at RBC Capital Markets LLC. “The problems in Greece especially and the possibility, according to the Germans, that they’re preparing for Greece to leave the euro, there’s geopolitical turmoil.”

Net-long positions rose 5.7 percent to 98,391 futures and options in the week ended Dec. 30, after dropping 11 percent in the previous two weeks, according to U.S. Commodity Futures Trading Commission data published Jan. 5. Short wagers slid 8.2 percent.

December Rally

Bullion futures advanced 0.7 percent last month and traded at $1,205.40 an ounce by 12:59 p.m. Seoul time on the Comex in New York. The Bloomberg Commodity Index fell 7.6 percent in December, the sixth straight monthly decline, while the Bloomberg Dollar Index rose 2.2 percent, the sixth straight gain. The MSCI All-Country Index of world equities slid 2 percent in December.

As a traditional haven in times of turmoil, gold got a boost from concern that Greece may leave the euro area, which sent the European currency to its lowest against the dollar since 2006. Prime Minister Antonis Samaras failed to secure backing for a presidential candidate, leading to snap elections in three weeks.

The opposition Syriza party, which leads in the polls, is campaigning against austerity measures imposed as a condition of Greece’s two bailouts after the financial crisis. Samaras says a Syriza victory would lead to default and the country’s exit from the euro. Gold priced in euros climbed 12 percent last year and this week reached the highest since September 2013.

Investment Alternative

A retreat in equity markets also is fueling demand for gold. After reaching a record on Dec. 29, the Standard & Poor’s 500 Index of equities is down 3.3 percent, and the MSCI All- Country Index also has declined.

Physical buying in China is rising as the country’s New Year celebrations approach in February, and the annual rolling average of volumes traded on the Shanghai Gold Exchange is at an all-time high, Barclays Plc analyst Suki Cooper said in a Jan. 5 note. Eased import restrictions in India and smaller Chinese stockpiles may also help spur demand in 2015, Australia & New Zealand Banking Group Ltd. strategists Victor Thianpiriya and Mark Pervan said in a Dec. 17 report.

In Japan, the government announced plans last week to reduce corporate tax rates, after approving a 3.5 trillion yen ($29 billion) fiscal-stimulus package to boost the economy after a sales-tax increase in April caused a slump in consumption.

Reduced Demand

Gold demand remains weak after dropping in 2014, when prices fell for a second straight year. Coin sales at the U.S. Mint saw the biggest annual drop in eight years, while gold- backed exchange-traded products lost $7.4 billion, the second straight decline, data compiled by Bloomberg show. The plunge in crude oil to below $50 a barrel, the lowest in more than five years, is eroding gold’s appeal as an inflation hedge.

U.S. economic growth is fueling speculation the Federal Reserve will raise interest rates that have been near zero percent since 2008. Fewer Americans filed for unemployment benefits in 2014 than at any time in 14 years, and the economy expanded at a 5 percent annualized rate in the third quarter, the most in 11 years, recent government data show. Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by gold, fell on Dec. 31 to 709.02 metric tons, the lowest since 2008.

Investors have also turned away from gold as the dollar rallied against other currencies and U.S. equities surged to records in 2014, even after unrest in the Middle East and Russian President Vladimir Putin’s annexation of part of Ukraine led to economic sanctions.

No Rush

“There’s less global tension, Putin is on a leash, there’s low inflation, and that hurts gold,” Ashmead Pringle the president of GreenHaven Commodity Services, whose GreenHaven Continuous Commodity Index Fund oversees about $275 million, said in a telephone interview from Atlanta on Jan. 2. “I don’t see any big short-term rush back to gold as a safe haven.”

Net-wagers across 18 U.S. traded commodities fell 1.9 percent to a four-week low of 795,256 contracts as of Dec. 30, CFTC data show.

Speculators became less bullish on oil as wagers on a rally slid for a second week, down 3.6 percent to 199,388 contracts. West Texas Intermediate tumbled 46 percent last year, the most since 2008, and traded around $50.25 a barrel today.

Agriculture Holdings

Combined net-long positions across 11 agricultural products rose 0.4 percent to 521,050 contracts.

Investors cut bullish wagers on coffee for a fifth straight week to the lowest since February, after futures slid 14 percent in the fourth quarter.

The net-long position in wheat dropped 8.1 percent to 20,481 contracts. Prices on the Chicago Board of Trade fell 4.8 percent last week, the most in 15 weeks, as U.S. exports declined and Russian export taxes failed to disrupt ample world supplies. Global output of corn, soybeans and wheat are expected to reach records this marketing year.

“We have a strong dollar that’s been pushing commodities down, and you also have energy declining significantly,” Jon Guyer, a Laurel, Maryland-based portfolio manager at Arrow Investment Advisors LLC, which manages $722 million, said in a telephone interview Jan. 2. “If energy remains very low, that would help reduce the overall cost of production,” allowing growers to expand output, he said. – BLOOMBERG