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(Kitko News) – For the first time in three years, hedge funds have gone bearish on gold, according to the latest data from the Commodity Futures Trading Commission.
While the gold market is technically oversold, many analysts say the bearish momentum in the market could see prices drop below $1,700 an ounce.
“Investors cut the net length by a very large 6% of open interest (3 million ounces) as it became abundantly clear that real rates at the short end of the curve would continue to rise and there was little chance of growth as nominal policy rates shot up and inflation expectations have eased along with the looming economic downturn,” TD Securities analysts said. “Continued Fed hikes and lower economic activity should see gold continue to shorten its length, with prices likely to remain under pressure in the coming weeks.
In the CFTC Disaggregated Commitment of Traders Report for the week ended July 12, money managers reduced their speculative gross long positions in Comex gold futures by 11,803 contracts to 91,669. At the same time, short positions rose 11,364 contracts to 97,802.
For the first time since May 2019, speculative gold positioning fell by 6,133 contracts. During the survey period, gold prices tested support at around $1,700 an ounce.
“The gold market has clearly turned bearish,” commodity analysts at Société Générale say.
Analysts note that gold continues to suffer as the Federal Reserve maintains its aggressive stance on monetary policy. Last week, markets began to consider the possibility of a full 1% Fed rate hike after US inflation climbed to a 40-year high above 9%. However, expectations eased again and markets got used to a 75 basis point move.
Analysts say the Fed’s aggressive stance could push the US into recession, causing enough demand destruction in commodity markets to cool simmering inflationary pressures.
SocGen analysts noted that this environment is pushing real yields and the US dollar higher, which are the two main headwinds for gold.
“The DXY index rose 1.44% in the week to July 12 to 108, its highest level since 2002. Real rates in the US rose by 13 bp. over the same period and since mid-June have significantly exceeded 50 bp. June 2019,” the analysts said.
The French bank noted that the entire precious metals complex experienced a bearish outflow of almost $4.2 billion last week, mostly due to gold.
According to trading data, hedge funds remain bearish on silver, but are also not aggressively liquidating their bullish bets.
The disaggregated report showed that money-driven gross speculative long positions in Comex silver futures fell 227 contracts to 37,095. At the same time, short positions rose 1,476 contracts to 47,543.
Silver’s position is net short 10,448 contracts, almost unchanged from the previous week. During the study period, silver prices fell below $19/oz and tested support at $18/oz.
Analysts note that silver is much more sensitive to rising recession fears. The decline in economic activity will lead to weak industrial demand for the precious metal. Nearly 60% of silver demand is for industrial applications.
While silver remains bearish, some analysts say they could be the first to rise if sentiment starts to turn. There are some preliminary indications of a bottom in industrial metals such as copper.
For the first time in four weeks, low copper prices caught the attention of hedge funds.
Copper’s disaggregated report showed that cash-driven gross speculative long positions in Comex high-grade copper futures rose 1,091 contracts to 39,968 contracts. At the same time, short positions decreased by 7,295 contracts to 58,309.
Copper market positioning remains bearish, but the net short position has risen to 18,341 contracts, up almost 46% from the previous week.
Despite some optimism in the market, some analysts still see a difficult environment for copper in the near term.
“Our commodities numbers point to red as the most vulnerable metal in the complex, showing a strong asymmetry in demand signals to the downside. underwent significant short acquisitions and liquidations last week,” TDS analysts said.
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