Gold prices are stuck in 'purgatory'

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Published Dec 19, 2016

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New York - Gold is in the doldrums. Prices have fallen for six straight weeks, the worst streak

in a year, as prospects for higher US borrowing costs damped demand for gold,

a for non-interest-bearing asset. Investors don’t seem too optimistic about the

outlook for 2017. Hedge funds cut their bets on a rally to the lowest since

February, while outflows are ramping up from exchange-traded funds.

After the metal’s best first half since 1979, bullion has

been losing its luster as US equities rallied to records. A stronger dollar

and rising bond yields have also crimped demand for the alternative asset.

Federal Reserve officials last week signaled a steeper path for interest rates

in 2017, after raising borrowing costs for the first time this year. While

money managers have cut their wagers on a gold rally for five consecutive

weeks, their net-position is still more than double what it was at the end of

January.

“People are still too optimistic on gold,” said John

LaForge, the Sarasota, Florida-based head of real assets strategy at Wells

Fargo Investment Institute. “We’re in a price purgatory for a lot of

commodities, including gold. You’re going to have a lot of investors and

strategists like myself reduce their price forecasts.”

Bull wagers

The net-long position, or bets on price gains, for gold

declined 15 percent to 68 905 futures and options contracts in the week ended

December 13, according to US Commodity Futures Trading Commission data released

three days later. The holdings are down 61 percent over the five-week slump.

On the Comex in New York, gold futures rose 0.3 percent to

$1 140.90 an ounce on Monday, after a 2.1 percent loss last week. Prices

touched $1 124.30 on December 15, the lowest since February.

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Earlier this year, bullish sentiment for gold was partly

driven by political uncertainty as Britain voted to exit the European Union and

amid a heated US election cycle. Just before Americans took to the polls on

November 8, gold was trading near a one-month high. Since then, prices have slumped

about 11 percent as there’s been relative calm in the election aftermath and as

equities rallied on president-elect Donald Trump’s pro-business policies.

Investors are positioning for more stability. In the month

through December 15, they pulled $6.2 billion from ETFs tracking precious metals - the largest withdrawal across asset classes, data compiled by Bloomberg show.

The biggest casualty was SPDR Gold Shares, the top fund backed by bullion.

Holdings in global gold ETFs dropped for 26 straight sessions through Friday,

the longest slide since 2013.

While assets in the gold ETFs are still up for the year,

Goldman Sachs Group Inc. estimates that the “vast bulk” of the holdings are

losing money at current prices, analysts said in a Nov. 21 note. If investors

were to withdraw from even half of those money-losing holdings, it would spark

a $60 sell-off in prices, the bank said.

China, India

Even the physical market doesn’t look promising. China in

November refrained from adding to its gold reserves for the first time in six

months, according to People’s Bank of China data compiled by Bloomberg.

Imports to India are down 43 percent in the first 11 months of the year

compared with 2015, provisional ministry data compiled by Bloomberg show. The

countries are the world’s top bullion buyers.

Still, political uncertainty remains, and that could spark a

rebound in gold. Trump’s presidency carries a lot of unknowns, including how

his trade policies could impact the US economy. European Central Bank

President Mario Draghi has warned that the combination of rising global interest

rates and explosive politics could expose the area’s economy to weakness, and

Swiss National Bank policy makers last week cited structural problems in a

number of advanced economies that could “negatively affect the outlook.”

“We are starting to see people say, well perhaps gold is a

contrarian buy because political risks haven’t gone away,” said Frances Hudson,

an Edinburgh-based global thematic strategist at Standard Life Investments,

which oversees $360 billion.

BLOOMBERG

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