Hedge funds remain bearish on gold, but a potential short squeeze is building
Hedge funds continue to liquidate their bullish gold bets and increase their short positioning as the Federal Reserve is expected to maintain its hawkish bias and keep interest rates elevated at aggressive levels for the foreseeable future.
The CFTC's disaggregated Commitments of Traders report for the week ending Aug. 22 showed money managers increased their speculative gross long positions in Comex gold futures by 8,061 contracts to 105,085. At the same time, short positions rose by 12,366 contracts to 95,976.
"Sharply higher petroleum complex prices over the last several weeks and spiking rates along the yield curve prompted specs to take on short exposure and liquidate longs. Concerns that gold may go through support to significantly lower levels near $1,840 was also a significant driver," said analysts at TD Securities.
The gold market is now net long by 9,109 contracts, as bullish speculative positioning has dropped to its lowest since mid-March.
Analysts at TDS added that the precious metal has room for speculative positioning to turn negative in the near term.
Commodity analysts at Société Générale noted that gold has seen bearish outflows for three consecutive weeks, with $3.9 billion following out of the market this past week. So far this month, gold's speculative bullish positioning has dropped by more than 7 million ounces, its biggest one-month decline since May 2018.
However, during the survey period, gold prices traded in a fairly narrow range between $1,920 an ounce and $1,930 an ounce.
While speculative interest in gold has fallen to neutral territory, the price has managed to hold critical support levels, and according to some analysts, this resilience in the marketplace could create conditions for a short squeeze.
In a recent interview with Kitco News, Christopher Vecchio, head of futures and forex at Tastylive.com, said he thinks the worst days for gold and silver could be over.
"You can't ignore the strength in gold and silver right now. It appears that the floor in the market has been raised. The market is not ready to run higher, but I expect we could trend around $1,900 for a while," he said.
The silver market is already seeing the benefits of a short-squeeze as speculative interest pushes back into neutral territory after being net short for two consecutive weeks.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 4,787 contracts to 36,497. At the same time, short positions fell by 3,266 contracts to 35,114.
The silver market is now net-long by 1,383 contracts. The renewed bullish speculative positioning pushed gold prices back above $23 an ounce. Silver prices have rallied further, pushing back above $24 to a three-week high by the end of last week.
Analysts note that silver continues to benefit from growing industrial demand as the global green energy transition drives demand for solar power.
However, other analysts note that while there is some upside bias in the marketplace, the precious metal faces some challenging headwinds as the Federal Reserve maintains its aggressive monetary policies.
Analysts note that rising bond yields as the markets prepare for a potential rate hike in November is providing some support for the U.S. dollar, which in turn will weigh on silver.
Source: https://www.kitco.com/