Gold investors now racing to exit in biggest futures slump since 2013

The headquarters of the European Central Bank (ECB) in Frankfurt, Germany.
The headquarters of the European Central Bank (ECB) in Frankfurt, Germany. PHOTO: REUTERS

NEW YORK/LONDON (BLOOMBERG) - The trickle of investors exiting gold in recent months has grown into a torrent.

Gold futures slumped by the most in almost three years on Tuesday (Oct 4) amid speculation that the period of easy monetary policy is ending. The European Central Bank is said to be building an informal consensus to gradually wind down bond purchases, while Federal Reserve officials are talking up the increasing likelihood of an interest-rate rise in the US.

After posting the best first half in almost four decades, bullion is faltering as the prospect of higher rates and reduced stimulus curb demand for the metal as a store of value. Gold slid below US$1,300 an ounce for the first time since June in New York trading on Tuesday after Fed Bank of Richmond president Jeffrey Lacker urged a rate hike to head off a pickup in inflation. As yields on 10-year Treasuries and German bunds rose, the gold sell-off gathered steam.

"The race for the exits seems to be on," said Mr Brad Yates, head of trading for Dallas-based refiner Elemetal. "While we may rally off the lows for a few days, we think there is a lot of backlog built up in the system that will be looking to get out."

By the time prices settled on Tuesday on the Comex, bullion futures for December delivery were down 3.3 per cent to US$1,269.70, the biggest loss for a most-active contract since December 2013. Futures were up 0.4 per cent in Asia on Wednesday.

Spot gold also ticked higher on Wednesday. It was up 0.3 per cent to US$1,272 an ounce at 9.55am in Singapore, after falling 3.3 per cent the day before, the most since July 2015, according to Bloomberg generic pricing.

Futures slipped 0.3 per cent last quarter after rising 25 per cent in the first six months of 2016. On Tuesday, the drop below US$1,300, considered a key support level for traders who study charts, triggered liquidation of bullish bets "on a major scale", Mr Ole Hansen, head of commodity strategy at Saxo Bank, said by e-mail.

Options trading on SPDR Gold Shares, the largest exchange-traded fund backed by the metal, surged above 500,000 contracts, more than double the 20-day average, according to data compiled by Bloomberg.

The downside has further to go and prices will likely bottom at U$1,257 an ounce, said Ms Georgette Boele, a strategist at ABN Amro Bank in Amsterdam and last quarter's second-most accurate gold forecaster tracked by Bloomberg. A break below that level could mean the end of this year's uptrend in the metal, she said in a report.

Bullion companies weren't spared. Shares of Newcrest Mining Ltd, Australia's biggest gold producer, fell as much as 7.6 per cent in Sydney trading on Wednesday, headed for the lowest close in three months, while Evolution Mining Ltd tumbled 9.3 per cent. Zijin Mining Group Co slid 3.6 per cent in Hong Kong.

"A perfect storm pummels gold," Tai Wong, director of commodity products trading at BMO Capital Markets in New York, said in an e-mail, referring to Lacker's statement, the report on ECB tapering and the key technical level giving way. "There's increasing realisation by central banks and the market that we have reached operational as well as effective limits of easy money. That will impair gold."