Funds slash commodity bets

Funds reduced bets on rising commodity prices by the most in any week since February 2010 on mounting concern that a weakening global economy will slow demand for raw materials.

In the week ended Aug 9, speculators cut their net-long positions in 18 commodities by 19% to 989,110 futures and options contracts, government data compiled by Bloomberg show.

Copper holdings plunged 61%, the most since June 2010, and bullish gold bets fell to a five-week low.

The Standard & Poor’s 500 Index slumped 13% in the three weeks ended Aug 11. About US$2,300 billion was erased from US equity values over the period amid Europe’s debt crisis, speculation that the economy is slowing and S&P’s downgrade of the government’s AAA credit rating. The benchmark gauge for US shares dropped to within 11 points of a bear market.

“The shock waves felt through commodities, currencies, stock and bond markets over the last 10 days, that’s the primary driver,” James Dailey, who manages US$200 million at TEAM Financial Management LLC, said in a telephone interview from Harrisburg, Pennsylvania on Aug 12. Funds reduced holdings on signs “that the global economy is continuing to slow fairly rapidly,” he said.

Confidence among US consumers plunged this month to the lowest level since May 1980. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 54.9 from 63.7 the prior month. The gauge was projected to decline to 62, according to the median forecast in a Bloomberg News survey.

Investors put US$704 million into commodity funds in the week ended Aug 10, according to EPFR Global, a Cambridge, Massachusetts-based research company. Gold and precious metals funds had an inflow of US$2.14 billion, while all other funds saw an outflow of US$1.44 billion, said Cameron Brandt, EPFR’s director of research.

"This is what tends to happen when fear is driving people,” Brandt said in a telephone interview on Aug 12 “The momentum to global growth is running out of steam, and easy money is drying up. It’s really hard to imagine strong demand for industrial commodities such as copper, aluminum and zinc in the second half.”

Hedge funds and other money managers lowered their copper net-long position to 10,634 contracts from 27,345 on Aug 2, data from the US Commodity and Futures Trading Commission showed.

On Aug 11, gold futures surged to a record US$1,817/oz, and climbed 5.5% last week, the most since February 2009 and the sixth consecutive gain, while the S&P ended the week down 1.7%, after losing 7.2% the previous week, which was the most since 2008.

The Standard & Poor’s GSCI Spot Index of 24 raw materials plunged to an eight-month low on Aug 9 and ended the week down 0.4%, the third consecutive decline. Copper futures dropped 2% last week, the second consecutive decline.

“The depression in the stock market generally flows into other financial markets and speculative markets,” Philip Gotthelf, the president of Equidex Brokerage Group Inc. in Closter, New Jersey, said in a telephone interview on Aug 11.

“People are afraid to take on the risk of futures trading, so they’re limiting positions. The pressure on the stock market is putting pressure on tradeable commodities.”

Aug 15 (Bloomberg)