Traders See More Losses for Gold ETF as Dollar Rallies

Gold is losing its luster in the options market.
The metal has tumbled 13 percent since mid-March and traders are increasing bets that further declines are coming. The cost of puts on the SPDR Gold Trust (GLD) has reached the highest level in nine months relative to calls, while a measure of the exchange-traded fund’s volatility surged almost 50 percent last month.
Faster economic growth and speculation the Federal Reserve will tighten monetary policy has propelled the dollar to a four-year high and hurt demand for gold, often used as a hedge against inflation. Hedge funds and other speculators have pared bets on rising gold prices for the past seven weeks, the longest stretch since 2010. Goldman Sachs Group Inc., Societe Generale SA and HSBC Securities (USA) say they expect lower prices.
“There’s no point in buying gold,” John Stephenson, chief executive officer at Stephenson & Co. Capital Management in Toronto, said in a phone interview. The firm manages about C$45 million ($40 million). “You’ve got gold looking weaker because the U.S. dollar looks stronger, and that’s the first and most important factor.”
The $30 billion gold ETF, the biggest fund tracking bullion prices, sank 6.2 percent last month, the most since June 2013. For the year, it’s down 0.1 percent after soaring 15 percent to a high in March.
Put contracts betting on losses in the shares cost 3.9 points more than call options wagering on a rise, according to three-month data compiled by Bloomberg. The spread, known as skew, increased to 4.4 points on Oct. 3, the widest since Dec. 24.

Receding Risk

“Declining gold prices reflect strength in the dollar,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $67 billion in assets, said by phone. “Gold prices falling is indicative of receding macroeconomic risk, strength in the U.S. economy and a move by the Fed to less accommodative monetary policy.”
Demand for precious metals as a protection of wealth has been eroded by the outlook for a strengthening U.S. economy, which helped spark a rally in the dollar. The Bloomberg Dollar Spot Index has climbed for seven straight weeks and reached a four-year high on Oct. 3, strengthening versus all 16 of its most-traded peers in that period. The gauge dropped 0.9 percent yesterday, helping gold futures rebound 1.2 percent.
Speculation that the Fed will raise interest rates next year has also crimped demand for the metal as a hedge against U.S. inflation, as central banks in Europe and Japan pursue looser monetary policies. Gold fell the most in more than two months Oct. 3 as a report showed the U.S. jobless rate declined to a six-year low of 5.9 percent in September and employers added more workers than projected.

‘Faster Pace’

On Oct. 2, Goldman Sachs reiterated its forecast for prices to reach $1,050 an ounce in 12 months and HSBC cut its outlook for 2015 to $1,175 from $1,310. Recent economic expansion means the market will “start pricing a much faster pace of” increases for U.S. interest rates, Societe Generale said in a report Oct. 3, saying the metal will trade “well below $1,200.”
About $4 billion was erased from the value of exchange-traded products backed by gold this year through Oct. 3. Individuals pulled more than $986 million from the SPDR Gold ETF last month, the most since April, data compiled by Bloomberg show.

Long, Short

Hedge funds boosted net-short positions in New York bullion futures and options to the highest level on record in the week ended Sept. 30, U.S. Commodity Futures Trading Commission data show.
Net-long positions in gold fell to the lowest since December that week, a sign that a short squeeze could occur, according to Michael Purves, chief global strategist and head of equity derivatives research at Weeden & Co. in Greenwich, Connecticut. A so-called short squeeze occurs when prices rise as investors who made bearish bets are forced to buy the security to pay back borrowed shares.
When long-gold positions dropped to a six-year low in December, gold rebounded more than 10 percent in January and February after touching $1,182.57 intraday Dec. 31.
“For bears to decisively take out the intraday low from Dec. 31, they will likely need to see the dollar continue to rally aggressively, particularly given how aggressive the speculative positioning in gold futures has become,” Purves wrote in an e-mail yesterday. “Last Friday’s CFTC data showed net speculative positions at the same low levels reached in June and December of 2013, both of which preceded significant gold relief rallies.”

‘No Yield’

The Chicago Board Options Exchange’s Gold ETF Volatility Index, derived from options prices on the SPDR gold fund, jumped 47 percent in September for its biggest gain in 17 months. It has fallen 6.5 percent since. The CBOE Volatility Index, the gauge of Standard & Poor’s 500 Index options prices known as the VIX, rose 6.3 percent to 15.46 yesterday.
“Gold is going to continue to be weak as the dollar is strong,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said by phone. “You have an increasing interest-rate differential between the U.S. and Europe. If the dollar is appreciating, you’re going to come out of gold, with no yield, into the currency.”
To contact the reporters on this story: Callie Bost in New York at; Eric Lam in Toronto at
To contact the editors responsible for this story: Lynn Thomasson at Jeff Sutherland
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