Hedge Funds Cut Bullish Bets on Commodity Prices Amid ‘Contraction Fear'

Sept. 19 (Bloomberg) – Funds cut their bullish bets on raw materials for the first time in five weeks on speculation that demand for food, fuel and metals will decline as the European debt crisis deepens.

In the week ended Sept. 13, speculators lowered their net- long positions in 18 commodities by 5.2 percent to 1.21 million futures and options contracts, government data compiled by Bloomberg show. That was the first drop since early August. Funds slashed bullish bets on copper by 91 percent, and became bearish on wheat for the first time in four weeks. Wagers on rallies in gold, corn and gasoline also were reduced.

The Standard & Poor's GSCI Index of 24 commodities has tumbled 14 percent since reaching a two-year high in April as escalating debt woes in Europe and the U.S. raised concern that global growth will stagnate. European finance ministers ruled out efforts to prop up the faltering economy and gave no indication of providing aid for lenders at a Sept. 16 meeting.

"People are fearful of global contraction, based on everything that's going on in Europe," Jeffrey Sherman, who helps manage $16 billion for DoubleLine Capital in Los Angeles, said in a telephone interview. "There's a sense of nervousness about the markets, so it's a risk-off type of trade."

Investors placed 29 percent less cash in commodity exchange-traded products in the first seven months of the year, Roxanna Mohammadian-Molina, an analyst at Barclays Capital, said in a Sept. 14 report. Societe Generale SA's global asset- allocation team went "underweight" on commodities last week, saying that the asset class is in the "danger zone."

Copper Bets
In the week ended Sept. 13, hedge funds and other money managers cut their net-long positions in copper to 300 contracts, compared with 3,221 a week earlier, according to data from the U.S. Commodity Futures Trading Commission. The December-delivery contract shed 0.7 percent to $3.9030 per pound on the Comex in New York at 8:59 a.m. in Singapore, after losing 1.8 percent last week and falling 3 percent the week before.

Global copper stockpiles have climbed 4.7 percent since July 1, signaling waning demand. Fluctuations in the price of the metal, used in homes, cars and automobiles, have been used by economists including former Federal Reserve Chairman Alan Greenspan as a gauge for the economic outlook. Copper in New York has dropped 16 percent since touching a record in February.

"The industrial metals, with copper as a barometer, say there is fear out there," Sherman said.

Funds fled industrial metals and agricultural commodities because "it's very hard to see where growth is coming from, especially if there's a messy default in Europe," said Cameron Brandt, the director of research at EPFR Global, which tracks investment flows.

$692 Million
Investors put $692 million into commodity funds in the week ended Sept. 14, data from Cambridge, Massachusetts-based EPFR show. Gold and precious-metal funds had an inflow of $938 million, while all other commodity funds saw an outflow of $246 million, Brandt said in a telephone interview.

Gold futures, which surged to a record $1,923.70 an ounce on Sept. 6, are up 28 percent this year as economic turmoil boosted demand for a haven asset. Net-long investments in gold fell 6.1 percent to 185,767 contracts last week.

A measure of net-long positions for 11 agricultural commodities slumped 7.8 percent to 843,292 contracts, the biggest drop since Aug. 9.

Corn, Wheat
Corn prices slid 6 percent last week and wheat dropped to a five-week low on Sept. 15. The U.S. Department of Agriculture on Sept. 12 estimated that global demand for corn-based fuel and livestock feed will decline. Countries including Russia, Ukraine and Canada have boosted wheat production, increasing competition for U.S. supplies, the USDA said.

Funds cut their net-long positions in corn by 10 percent to 298,333 contracts, according to the CFTC data. Funds were net- short in wheat by 11,150 contracts, after being net-long by 13,495 contracts a week earlier.

"There's no hiding in any particular asset or any particular commodity when people are liquidating funds to raise cash," Kelly Wiesbrock, who helps manage $1.3 billion at San Francisco-based hedge fund Harvest Capital Strategies, said in a telephone interview. "Everything is correlated. That does create a real worry for me, in a sense, that what goes on in Greece and Spain and Italy has an impact here."