4:00 AM CST May 18, 2015

When the dollar loses, gold wins. At least that’s what hedge funds are betting.

Money managers who hoarded bullion at the fastest pace in more than a month were rewarded with the biggest rally in prices since January. Weaker U.S. consumer confidence and softening factory production drove the dollar lower for a fifth week, the longest stretch since 2013.

Gold, first struck into coins more than two millennia ago, is still sought by some investors as an alternative currency or hedge against inflation. Signs of cooling expansion mean the Federal Reserve could wait longer before raising interest rates, increasing the chances that inflation will accelerate. Record-low rates increase bullion’s appeal because the metal doesn’t pay interest, unlike competing assets such as new bonds.

“Right now, it would be a pretty interesting entry point, if you are a long-term investor,” Lara Magnusen, a La Jolla, California-based portfolio manager at Altegris Investments Inc., which oversees $2.65 billion, said by phone May 14. “We are shifting out of the fear of deflation, and moving into more of a reflationary world.”

Speculators’ net-long position in gold jumped 14 percent to 36,150 futures and options as of May 12, U.S. Commodity Futures Trading Commission data show. That was the third advance in four weeks and the biggest gain since April 7.

Price Rally
Futures jumped 3.1 percent last week to $1,225.30 an ounce on the Comex in New York, the most since Jan. 16. The Bloomberg Commodity Index of 22 components rose 1.2 percent, while the MSCI All-Country World Index of equities added 0.7 percent. The Bloomberg Dollar Spot Index lost 1.2 percent. Gold traded at $1,223.60 by 1:33 p.m. in Singapore on Monday.

More than $1.7 billion was added to the value of exchange-traded products backed by gold last week, the most in four months. Fed officials will probably cut their forecasts for expansion when they gather next month, a Bloomberg survey of economists showed. At their April meeting, policy makers had suggested that slowing growth would be “transitory,” sending bullion prices lower for a third month.

May Gains
Gold has rebounded almost 4 percent in May as more signs of sputtering growth challenged the Fed’s view and stoked speculation that borrowing costs will stay low for longer. The central bank’s benchmark rate has been near zero percent since 2008. Rising oil prices have also brought investors back to gold, on concern that higher energy costs will spur inflation.

Even while there have been some signs of weaker growth, an improving labor market still gives the Fed some room to raise rates for the first time in almost a decade. Claims for U.S. jobless benefits fell by 1,000 to 264,000 in the week ended May 9, pushing the monthly average to the lowest since April 2000, Labor Department data show. Gold dropped 29 percent in the previous two years as the dollar surged, inflation remained muted and the unemployment rate declined.
The U.S. economy is doing better than its global counterparts, and that will help the dollar to regain its appeal, according to Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel, Nicolaus & Co., which oversees about $170 billion. Gold reached this year’s low in March as the Bloomberg Dollar Spot Index climbed to the highest since the data begins in 2004.

‘Lackluster’ Inflation
“We would underweight the asset class,” Morganlander said, referring to precious metals. The dollar’s drop will be “short-lived,” while “global inflationary trends are lackluster and global economic growth continues to accelerate,” he said.

The metal swung between year-to-date gains and losses more than 10 times in 2015, gyrating as traders tried to gauge the timing of U.S. interest-rate increases.

That’s foiled some investors. Money managers misjudged the direction of gold for four straight weeks through May 5, raising wagers before price declines, and vice-versa, the CFTC data show. It was the speculators’ worst predicting streak since August 2012.

“You have a lot of conflicting data, sending mixed signals to the market, and that’s made it difficult for gold investors to make the right move,” said Harish Sundaresh, the Boston-based portfolio manager for the Loomis Sayles Alpha Strategies team, which oversees $5 billion. “Everyone’s been expecting a rebound in the U.S. economy, at least for the past month or so. But now, the data is pretty soft, so the perception is that the Fed will wait a little longer to raise rates.”