Bloomberg
New York


Gold bulls piled into the metal in hopes that the turmoil sweeping financial markets would finally help revive prices. They were wrong.
Instead of a rally, futures in New York fell for four straight sessions even as global equities plunged to a two-year low. Rather than providing a refuge from the meltdown, gold’s volatility rose right along with a measure of equity turbulence, diminishing its appeal as a haven. As stocks started to recover, the metal kept falling because of reports that signalled gains for the US economy.
It’s been a tough two years for investors in gold, which first fell into a bear market in April 2013. More than $52bn has been wiped from the value of physical bullion funds since then. Money managers last week raised their net-long position to the highest since June just before futures capped the worst slump in a month. Stubbornly low inflation along with the prospect of tighter US monetary policy has kept a lid on the metal, which doesn’t pay interest or offer returns, unlike competing assets.
“A good test for gold was the latest round of volatility, and gold did not do much, since it has become unattractive as a safe haven,” said Atul Lele, who helps oversee $5.1bn as the chief investment officer at Nassau, Bahamas-based Deltec International Group.
Futures fell 2.2% last week to $1,134 an ounce on the Comex, the biggest drop since July 24. The MSCI All-Country World Index of equities rose 0.5%, while the Bloomberg Dollar Spot Index advanced 0.7%. The Bloomberg Commodity Index jumped 1.8%.
Speculators more than tripled their net-bullish position to 44,271 futures and option contracts in the week ended August 25, according to Commodity Futures Trading Commission data released three days later. Long holdings rose for a third straight week, the longest run since January.
The Federal Reserve will probably push ahead to raise interest rates this year even after China’s surprise yuan devaluation this month that triggered global growth concerns and a selloff in equities, RBC Capital Markets’ Stephen Walker said in an August 23 report. Walker, the most-accurate gold forecaster last quarter in rankings compiled by Bloomberg, expects prices to remain weak in 2015 and cut his forecast for the second half of this year by 13% to $1,125.
Even as the US economy has proven to be resilient, Fed policy makers will have to contend with a weaker global-growth scenario. The world equity rout has lowered expectations for a quick rate rise, with traders as of Friday pricing in a 38% chance that policy makers will tighten at their September meeting. That compares with 48% two weeks earlier. The metal climbed 70% from December 2008 to June 2011 as the US central bank fanned inflation fears as it bought debt and held borrowing costs near zero in a bid to shore up growth.
“Gold will probably see some buyers return after investors realise there will probably be one rate hike this year, and that too, not a very big one,” said Dan Denbow, a portfolio manager at the $820mn USAA Precious Metals & Minerals Fund in San Antonio.
Still, gold demand is waning. Holdings in exchange-traded funds backed by the metal have dropped 12% over the past year and on Aug. 11 shrunk to the smallest since 2009.
With US inflation languishing below the Fed’s 2% target, there’s little interest in buying gold to hedge against rising consumer prices. A slump in crude oil, which has tumbled more than 50% over the past 12 months, has raised concerns that inflation will stay subdued.
“With global growth concerns re-emerging, we are seeing fears of deflation everywhere, and gold cannot do well in that kind of scenario,” said Jim Russell, a Cincinnati-based portfolio manager at Bahl & Gaynor Inc, which has about $14bn under management and advisement. “Lack of follow through in gold given the price action in other assets did strike me as a big surprise. As for now, we are staying away from gold.”