Hedge funds lifted their bets on a gold rally as signs of an improving US economy drove prices lower in the longest slump since April, while this year's bullion declines spurred losses for billionaire John Paulson.
US payrolls rose by 195,000 in June, beating analyst forecasts, data showed this week. US Federal Reserve chairman Ben Bernanke has said the central bank will trim its $US85billion in monthly bond purchases if the economy there continues to improve. Gold lost 25 per cent in 2013, heading for the biggest annual drop since 1981 and poised to snap 12 years of gains. Paulson's PFR Gold Fund tumbled 23 per cent in June, extending this year's loss to 65 per cent.
"People want to own gold for myriad reasons, but they've all been disappointed in the last couple of months," said Jeffrey Sherman, who helps manage more than $US57billion of assets for DoubleLine Capital in Los Angeles. "The lack of inflation and a strong dollar are headwinds that gold faces, and they're not going to change any time soon. The signs of improvement in the US economy just add to the list."
Gold futures dropped 13 per cent in the previous three weeks in the longest slide since April 19. Prices that more than doubled from the end of 2008 to a record $US1923.70 an ounce in September 2011 are down 35 per cent from the all-time high as some investors lost faith in the metal as a store of value.
The Standard & Poor's GSCI Spot Index of 24 commodities slid 2 per cent this year. The MSCI All-Country World Index of equities rose 6 per cent and the dollar climbed 5.7 per cent against six major trading partners. A Bank of America Corp index shows treasuries lost 3.1 per cent.
The US dollar climbed to a three-year high this week, cutting the appeal of gold as an alternative investment. Holdings in global exchange-traded products backed by the metal are down 24 per cent this year, helping to erase about $US61.8billion from the value of the assets. Paulson is the largest holder in the SPDR Gold Trust, the biggest bullion exchange-traded product.
Paulson & Co reiterated its commitment to investing in bullion and stocks of gold producers to hedge against currency debasement as global central banks pump money into the economy.
Investing in the firm's gold funds offers the "potential for outsized returns" if investors have a long-term view, according to a copy of Paulson's July 3 letter to investors.
Gold investors may see better returns in the rest of 2013, as gains averaged 1.3 per cent in the second half from 1981 to 2000, when bullion endured a two-decade bear market, data compiled by Bloomberg shows. First-half losses averaged 3.9 per cent in the period. India's demand for jewellery is set to pick up before the Diwali festival, said Catherine Raw, portfolio manager of BlackRock World Mining Trust. While the holiday begins in November, bullion buying usually starts in August, she said. "India is a major user of gold for jewellery and other items, so that certainly could give us a short-term lift," said Peter Jankovskis, who helps oversee about $US3.5billion of assets as co-chief investment officer at Lisle, Illinois-based OakBrook Investments LLC.
Total outflows from commodity funds were $834million in the week ended July 3, according to Cameron Brandt, director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Investors withdrew $636million from gold funds, said EPFR. Bullion will probably extend its losses, according to Societe Generale. Prices may average $US1150 next year, according to Michael Haigh, the head of the bank's commodities research who correctly forecast the metal's rout in April. Goldman projects gold will reach $1050 by the end of 2014, and Credit Suisse Group AG forecasts $US1150 in about a year.
The S&P GSCI commodity index climbed in the five sessions through yesterday, the longest rally in a month. The gauge is up 4.2 per cent since mid-April.