(Kitco News) – Hedge funds are starting to take an interest in silver as it could be the next major momentum play in the precious metal market while gold prices find a balance.
Historic speculative bullish interest in gold has pushed prices to multiple record highs in the last three weeks; however, silver has lagged significantly. The gold/silver ratio remains fairly elevated, trading above 88 points.
However, the latest trade data from the Commodity Futures Trading Commission (CFTC) shows that silver still has solid momentum as gold’s run starts to weaken.
The CFTC disaggregated Commitments of Traders report showed money managers increased their speculative gross long positions in Comex silver futures by 7,963 contracts to 53,484 for the week ending March 19. At the same time, short positions fell by 3,365 contracts to 16,362.
The silver market has seen its net bullish positioning increase for three consecutive weeks. The market is now net long by 37,122 contracts, its highest level since April 2022.
Although the silver market has seen a significant increase in bullish speculative positioning, the market is still well below the levels seen in early 2020, ahead of the rally towards $30 an ounce.
During the survey period, silver prices tested initial resistance at $25 an ounce.
“COT flows remain very whippy and still unengaged vs past trends with net COT length swinging from net short (~-100mn oz) to net long (~+150mn oz), but nowhere near 2021/22 peak levels of ~+250mn oz nor the ~+500mn oz peaks seen in 2016-2018,” said Nicky Shiels, head of metals strategy at MKS PAMP, in a note Friday. “Trying to time investor engagement is tricky, but as is the case with Gold, its usually a FOMO trade so a technical breakup & above $26 (a relatively sticky area) should attract the momentum crowd.”
While silver has been slow to wake up from its hibernation, many analysts note that it has plenty of time to catch up to gold.
In an interview with Kitco News last week, John LaForge, head of real assets at Wells Fargo, said that traditional silver is late to the party, but once it finds its momentum, it can easily outperform gold.
“Investors need to see gold move first and then they will get into silver,” he said. “It may be slow to rally but pretty soon silver will be the asset to own,” he said.
Some analysts have noted that silver has struggled as investor sentiment regarding the health of the global economy remained mixed. Although silver is a precious metal, roughly 50% of demand comes from industrial uses.
There are some concerns that weak industrial demand could lead to lower silver consumption. However, some analysts have noted that silver might be recession-proof as it remains a critical metal in the green energy transition as it is a major component in the production of solar panels. Analysts have said that the green energy sector remains an attractive target for government spending if the global economy does fall into a recession.
Optimism in silver comes as analysts see momentum in the gold market start to weaken. Although gold remains in a solid bullish uptrend, it could see some consolidation, prompting some hedge funds to reduce their exposure in the near term.
Commodity analysts at TD Securities said that the gold market has now fully priced in the Federal Reserve’s monetary policy easing, limiting its upside potential.
“The asymmetries in macro trader positioning in gold markets have completely dissipated,” the analysts said in a note Friday. “Non-commercial trader positioning was exactly unchanged on the week, in line with our advanced positioning analytics suggesting that macro trader positioning became precisely consistent with rates market pricing.”
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 1,406 contracts to 172,588. At the same time, short positions fell by 3,219 contracts to 29,692.
The gold market is now net long by 142,896 contracts and remains at its highest level since March 2022.
During the survey period, gold prices managed to hold solid support above $2,150 an ounce. Investors will have to wait until the end of the week to see a potential shift in speculative positioning following the Federal Reserve’s monetary policy decision.
Gold prices rose to a new all-time high above $2,220 an ounce after the Federal Reserve signaled that it still sees the potential for three rate cuts this year, even as inflation remains stubbornly elevated. Although gold rallied to a new record high, it wasn’t able to hold those gains and ended last week pretty much where it started.
While the gold market could see some higher volatility in the next few weeks as speculative positioning ebbs and flows, LaForge said that the broad trend remains up.
He added that central banks continue to provide solid support for gold prices. At the same time, he said that renewed interest from Western investors could help the market find a second wind in this weeks-long breakout rally.
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