Gold Rout Means Traders Least Bullish

By Nicholas Larkin - Dec 16, 2011 8:21 PM GMT+0700

Gold’s biggest rout in three months means traders are the least bullish since July and Dennis Gartman, the economist who sold the last of his metal on the day the slump began, warned of further declines.

Ten of 21 surveyed by Bloomberg expect the metal to gain next week, the lowest proportion since July 29. Three were neutral. While bullion’s slide of as much as 9 percent this week took its drop from the record $1,923.70 an ounce reached in September to almost 20 percent, the common definition of a bear market, investors are still holding near the most metal ever in exchange-traded products, a wager now valued at $120.6 billion.

Commodities retreated the most in almost three months and more than $640 billion was wiped off the value of global equities on Dec. 14 after the Federal Reserve refrained from taking new stimulus measures. That combined with signs of increased funding stress in Europe helped drive the dollar to the highest since January against the euro. Gold typically moves in the opposite direction to the U.S. currency.

“Bears are in the driver seat,” said Miguel Perez- Santalla, vice president of sales at Heraeus Precious Metals Management LLC in New York, whose clients include jewelers and mining companies. (BWMING) “But the problems in Europe have not been solved and buying will come back and we will see higher prices because of a lack of confidence in the financial system.”

Bank of America

Bullion rose 12 percent to $1,598.30 an ounce this year on the Comex in New York. Even after this week’s rout, it’s still the third-best performer in the Standard & Poor’s GSCI gauge of 24 commodities, which fell 1.7 percent. The MSCI All-Country World Index of equities retreated 12 percent this year and Treasuries returned 9.6 percent, a Bank of America Corp. index shows.

Options traders are still bullish. The most widely held option gives owners the right to buy gold at $2,000 by March, data from the bourse show. The eight biggest holdings are all call options at 13 percent or more above prices today.

While investors cut 13.3 metric tons of gold from their ETP holdings yesterday, the most since Aug. 24, assets are less than 1 percent below the record set Dec. 14, data compiled by Bloomberg show. Holders have a combined 2,347.5 tons, greater than the reserves of all but four of the world’s central banks and equal to more than 10 months of global mine supply.

Debt Crisis

Demand for physical gold accelerated this quarter at the fastest pace in more than a year as Europe’s debt crisis deepened. The European Central Bank cut interest rates for a second consecutive month last week to shore up growth. Lower interest rates increases the appeal of gold because it generally earns investors returns only through price gains.

“The fundamentals remain positive,” said Adrian Day, the president of Adrian Day Asset Management in Annapolis, Maryland. “Both the European Central Bank and Fed remain easy. After this cleansing, gold will move up again.”

Gartman said on Dec. 13 traders were witnessing the “death of a bull” and “the beginnings of a real bear market” that may drive prices as low as $1,475. Bullion may “cascade” lower if prices drop below yesterday’s lows by early next week, he wrote today in his Suffolk, Virginia-based Gartman Letter. If that were to happen, he would “begin to look again at buying gold,” he wrote.

While gold is heading for an 11th consecutive annual gain, this week’s declines mean it is also poised for its first quarterly drop in three years.

Money Managers

Hedge funds and other money managers boosted bets on higher futures prices by 3.5 percent to 151,347 contracts in the week ended Dec. 6, the first gain in three weeks, U.S. Commodity Futures Trading Commission data show. Prices declined 4 percent in the week through Dec. 13 and dropped another 5.6 percent since then. The CFTC will announce the latest data today.

Gold may drop below $1,500 an ounce in the “short term,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt, who is forecasting an average of $1,800 next year. “Gold is not a safe haven at the moment,” he said.

The metal plunged as much as 20 percent in the three weeks through Sept. 26 as investors sold to cover their losses elsewhere, before rebounding as much as 18 percent in the following six weeks. The September plunge halted at the metal’s 200-day moving average. Two days ago, gold closed below that measure for the first time since January 2009.

Gold Rally

That move means prices may tumble to $1,400 “in a hurry,” said Dave Lutz, head of exchange-traded-fund trading and strategy at Stifel Nicolaus & Co. in Baltimore. Gold may drop to $1,550 before rallying to as high as $2,400 in the second half of next year, Citigroup Inc.’s CitiFX Technicals predicted in a report Dec. 14.

The plunge may spur more buying from central banks, who are expanding reserves for the first time in a generation, and put a “floor” on prices, said Day of Adrian Day Asset Management. The World Gold Council expects central banks to buy as much as 450 tons this year. Official holdings stand at 30,708 tons, data from the London-based council show.

The metal should rally in the second half of next year “given the turmoil in Europe,” Bank of America wrote in a note yesterday, predicting bullion will reach $2,000 in 12 months.

Twelve of 24 traders and analysts surveyed by Bloomberg expect copper to fall next week. The metal for delivery in three months, the London Metal Exchange’s benchmark contract, declined 23 percent to $7,384 a ton this year.

Sugar Slumps

Raw sugar retreated 28 percent this year to 23 cents a pound on ICE Futures U.S. in New York. Six of 10 people surveyed expect prices to drop next week.

Nine of 21 anticipate a gain in corn, with four neutral, while the same number said soybeans will rise. Corn slipped 7.8 percent to $5.7975 a bushel in Chicago this year, and soybeans slid 20 percent to $11.2575 a bushel.

“Stock markets are going down, the euro zone is going into recession, China is slowing down, you’ve got a million reasons to go underweight commodities,” said Jesper Dannesboe, an analyst at Societe Generale SA in London. “It may bottom out in the first quarter. You’re going to see quantitative easing and that will stabilize the markets. There’s not going to be a big bull market, but it will help stabilize.”

Gold survey results: Bullish: 10 Bearish: 8 Hold: 3
Copper survey results: Bullish: 10 Bearish: 12 Hold: 2
Corn survey results: Bullish: 9 Bearish: 8 Hold: 4
Soybean survey results: Bullish: 9 Bearish: 8 Hold: 4
Raw sugar survey results: Bullish: 3 Bearish: 6 Hold: 1
White sugar survey results: Bullish: 2 Bearish: 7 Hold: 1
White sugar premium results: Widen: 2 Narrow: 4 Neutral: 4 

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net.

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.