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Gold Posts Biggest Loss in Nearly Three Years

Posted by hkarner - 6. Oktober 2016

Date: 05-10-2016
Source: The Wall Street Journal

Türkische Goldhändler leiden unter RekordhochMetal’s value pushed down by stronger dollar, signals Fed might be closer to rate rise this year

Gold prices notched their biggest decline in nearly three years and the dollar rose against the yen for a sixth consecutive day, the latest sign markets are on edge about the future of central-bank stimulus.

Gold for October delivery closed down 3.3% at $1,266.30 a troy ounce, its lowest settlement price since June 23 and its biggest loss since Dec. 19, 2013. Silver fell 5.8% to $17.71 a troy ounce in its biggest drop since January 2015.

The precious-metals declines were driven in part by the autumn resurgence of the dollar, reflecting the gradual improvement of the U.S. economy. The dollar gained 1.2% Tuesday to ¥102.89, its highest level since Sept. 5.

The action came a day after a strong U.S. economic report and on a day when Federal Reserve Bank of Cleveland President Loretta Mester reiterated her call for a December rate increase.

But the size of the swings relative to the day’s news stood out to traders, with many saying investors were locking in gains on assets that have appreciated sharply in 2016. Gold is up 19% this year and silver has risen 29%, reflecting in part the Fed’s retreat from its earlier interest-rate increase expectations.

“This is very much a case of people paring down their positions,” said Bart Melek, head of commodity strategy at TD Securities.

The action also was the latest example of the hefty volatility that has been unleashed each time in recent months that market sentiment shifted on the future path of monetary policy around the globe, even without a shred of evidence that any change is at hand.

In September, concerns swept the bond market that prices would be hammered if the Bank of Japan were to reduce purchases of long-term government debt. Prices recovered after a brief decline, though they have fallen again this week, pushing yields higher. The 10-year U.S. Treasury note recently yielded 1.68%.

On Tuesday, a report by Bloomberg News fanned jitters over possible tapering of bond buying from the European Central Bank. The report didn’t say such action was imminent, only that it would be the approach taken once the ECB decides to end the program.

Magnifying recent selloffs, traders said: crowding positioning across markets by hedge funds and lower liquidity as big banks retreat from daily trading.

A reversal by hedge funds that chase trends may have exacerbated the selloff in both metals today. Commodity trading advisers—firms that make bets using algorithms via futures contracts—helped push long positions in gold by buy-side investors to near a 10-year high, according to Jue Xiong, a research analyst at Bank of America Corp. This meant that as investors cut exposure, asset moves are magnified and at times self-reinforcing.

“You want to know what is going to happen when they take the punch bowl away? Today is just a tiny, tiny hint,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York.

Bets on higher gold prices in the futures market by large speculators including hedge funds stood at around 311,000 contracts last week, CFTC data showed. That is higher than in August 2011, the weeks leading up to gold’s climb to an all-time high.

Options trading of gold exchange-traded funds soared on Tuesday. Volume of puts—or contracts that give the right to sell—on the SPDR Gold Trust was triple the one-month average, according to options-data provider Trade Alert. The ETF tracks the price of the precious metal.

“People are throwing in the towel” after diving into bullish options, or calls, yesterday, said Fred Ruffy, an analyst at Trade Alert.

Federal-funds futures, used to bet on central-bank policy, showed late Tuesday that investors assigned a 58.9% likelihood to a rate increase in December, down from 61.6% the previous day, according to CME data.

Expectations of higher rates often pressure gold, which struggles to compete with yield-bearing investments like Treasurys when the economy picks up and borrowing costs rise.

“The market is coming to terms with what may be a new burst of dollar strength and a U.S. economy that is strong enough to bear an interest-rate increase,” said Ira Epstein, a strategist at the Linn Group. “This is where you step away from gold.”

Investors also are looking ahead to September nonfarm-payrolls figures from the U.S. on Friday. A strong number could bolster the case for a rate increase in December and dent gold further, analysts said.

“I think any strength of the U.S. economy is going to be negative for gold,” said John Davies, a global industry strategist at BMI Research.

Some traders said the dollar’s rise bears watching because the U.S. currency’s gradual retreat this year has underlain the rise to records of the Dow Jones Industrial Average and S&P 500, and the recovery of many commodities and emerging-markets assets. On Tuesday, the Dow shed 85.40 points to 18168.45.

Many are skeptical. The arguments for buying gold, such as low inflation in the U.S. and negative interest rates in Europe and Japan, show no signs of going away, said Peter Hug, global trading director at Kitco Metals.

“Absolutely nothing has changed,” Mr. Hug said. “At these levels, I’m a buyer.”

 

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