Global Chaos Makes Gold a Holiday Winner for Hedge Funds

(Bloomberg) -- Forget frankincense or myrrh -- chaos in global markets makes gold the holiday asset hedge funds are getting behind.

Money managers are the most bullish they’ve been on bullion in half a year amid a multitude of threats that could slow economic growth and deepen the plunge for equities. As financial anxieties heighten, investors have poured about $1.25 billion into exchange-traded funds backing precious metals over the past month, the biggest inflows among commodity ETFs. Open interest for gold futures is also on the rise.

Prices have climbed more than 2 percent in December, on pace for the biggest monthly gain since August 2017. Traders flocked to the haven asset as turmoil in the White House extended declines for the stock market. Concerns over slower global growth grew after the Federal Reserve lifted U.S. interest rates on Dec. 19, driving declines for the dollar.

“The market is questioning whether the Fed is making a policy mistake, and that could lead not only to slower growth, but perhaps to a recession,” said Quincy Krosby, the chief market strategist at Prudential Financial Inc., which has about $1.4 trillion in assets under management. For equities, when you see this “heavy selling, it’s indicative of fear, and gold becomes a safe-haven allocation.”

Here’s what traders are watching:

Fund Wagers

In the week ended Dec. 18, money managers more than doubled their net-long position, or the difference between wagers on a price increase and bets on a decline, to 24,569 futures and options, according to the U.S. Commodity Futures Trading Commission data released three days later. That’s the most bullish since mid-June.

Long-only wagers jumped 15 percent to 112,974 contracts, the second gain in three weeks.

The Fed

The Fed sent shock waves across assets after policy makers raised rates for the fourth time this year and lowered their forecast for hikes next year to two from three. Markets had been priced for just one. The stock market slumped on concerns the rising borrowing costs would hurt growth. Meanwhile, currency traders took the move as dovish, sending the dollar lower. That created a bullish spark for gold that sent prices above the 200-day moving average.

Still, the Fed’s intention to raise rates could eventually run counter to gold’s appeal, because it doesn’t pay interest or offer dividends like assets such as bonds, equities or even cash.

“In the very, very short term, if people don’t want to put money into cash then, there’s probably nothing wrong with buying gold, but with interest rates being up, cash is actually paying a return for the first time in a decade,” said Randy Frederick, a vice president of trading and derivatives at Charles Schwab & Co. Inc. in Austin, Texas. “Frankly, that’s probably a better place to be because even if the market does come down or we go into a bear market, that 2 percent return on cash will still be there.”

U.S. Uncertainty

The abrupt resignation of Jim Mattis as defense secretary has stoked turmoil in President Donald Trump’s White House and sparked worries among governments from Brussels to Beijing about the reliability of American alliances.

Negative news is having more of an impact on gold than it has the past six months, according to Dan Denbow, a senior portfolio manager at USAA Asset Management Co. that oversees more than $400 million in assets. After declining for most of 2018, open interest in New York futures has started to rebound.

“Gold, as we all know, has many narratives, but right now I think it is uncertainty,” Prudential’s Krosby said.

To contact the reporter on this story: Joe Deaux in New York at jdeaux@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Millie Munshi, Joe Richter

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