(Kitco News) – Surprisingly persistent inflation in August prompted hedge funds to dump their bullish bets on gold and increase their short positions, according to last week’s trade data from the Commodity Futures Trading Commission.
Analysts have noted that speculative interest in gold has only worsened as traders prepare for the Federal Reserve to raise interest rates another 75 basis points and signal a further commitment to their aggressive monetary policy stance.
However, while hedge funds have soured on gold, some analysts note that conditions are again building for a possible short-covering rally. Some analysts note that silver‘s rally last week could be a blueprint for gold to follow.
Three weeks of consecutive selling in the silver market pushed bearish speculative positioning to a two-year low, which set the stage for a one-day 6% move in the precious metal.
The CFTC disaggregated Commitments of Traders report for the week ending Sept.13 showed money managers increased their speculative gross long positions in Comex silver futures by 4,495 contracts to 38,352. At the same time, short positions fell by 11,963 contracts to 46,637.
Silver’s net short position dropped 66.5% from the previous week. During the survey period, silver prices rallied from below $18 an ounce to test resistance at $20. However, silver hasn’t been able to hold that momentum.
Some analysts have noted that silver is benefiting more from its industrial component as demand for green renewable energy improves. Analysts also say that silver prices below $18 an ounce presented a solid value opportunity for investors.
While silver has attracted some bullish inflows, investors continue to liquidate their gold positions. Bearish bets in gold have increased over the last five consecutive weeks.
The disaggregated report showed that money-managed speculative gross long positions in Comex gold futures fell by 5,542 contracts to 80,300. At the same time, short positions rose by 5,833 contracts to 98,637.
Gold’s net short positioning dropped to 18,337 contracts, more than double from the previous week. Analysts note that gold‘s speculative positioning has grown even more bearish as prices trade near a two-year low at a critical long-term support level.
The drop in gold prices prompted TD Securities to increase their tactical short position.
“We see the potential for continued outflows from money managers and ETF holdings to weigh on prices, which ultimately raises the probability of a pending capitulation from the small number of family offices and proprietary trading shops who hold complacent length in gold,” TDS said in a note to clients.
Although gold prices are struggling to attract attention, some analysts remain optimistic that the precious metal can still turn around.
“Gold is extremely vulnerable to short covering as the current short positions are above the 90th percentile over the past two years,” said commodity analysts at Société Générale.
Ole Hansen, head of commodity strategy at Saxo Bank, said he also sees some potential for gold.
“Speculators flipped their gold position to a net short in the week to September 13 and it highlights the upside risk should the price manage to break above the twice rejected support-turned-resistance level at $1680,” he said.
As to what could trigger a rally in gold, the biggest factor remains the U.S. dollar, which some analysts have said is overbought at it remains near a 20-year high.
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