(Kitco News) – For the first time in three years, hedge funds have become net bearish on gold, according to the latest data from the Commodity Futures Trading Commission.
Although the gold market is technically oversold, many analysts said bearish momentum in the market could push prices below $1,700 an ounce.
“Investors reduced net length by a very large 6% of open interest (3 million ounces) as it became very apparent that real rates at the short end of the curve would continue to rise and there was little chance of upside as nominal rates surged higher and inflation expectations eroded along with the lingering economic downturn,” TD Securities analysts said. “Continued Fed hikes and less economic activity will see gold’s length continue to erode, with prices also remaining under pressure in the coming weeks.
The CFTC report on dealer commitments for the week ended July 12 showed that 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 increased by 11,364 contracts to 97,802.
For the first time since May 2019, the speculative gold position has been reduced 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 said.
Analysts note that gold continues to suffer as the Federal Reserve maintains its aggressive stance on monetary policy. Last week markets began pricing in the possibility of a full 1% hike in the Fed Funds rate after US inflation rose to a 40-year high above 9%. However, expectations have eased and markets are comfortable with a 75 basis point move.
Analysts said the Fed’s hawkish stance could push the U.S. into recession, creating enough demand destruction in commodity markets to dampen simmering inflationary pressures.
SocGen analysts noted that this environment is pushing up real yields and the US dollar, two major headwinds for gold.
“The DXY rose 1.44% in the week to July 12 to 108, its highest level since 2002. US real interest rates rose 13 basis points over the same period and were well above the 50 basis points from in mid-June, a level not sustained since June 2019,” the analysts said.
The French bank noted that the entire precious metals complex saw almost $4.2 billion in downward outflows last week, mainly due to gold.
According to trade data, hedge funds are still bearish on silver, but are also not aggressively liquidating their bullish bets.
The aggregate report showed money-managed speculative gross long positions in Comex silver futures fell by 227 contracts to 37,095. At the same time, short positions increased by 1,476 contracts to 47,543.
Silver’s position is net short 10,448 contracts, almost unchanged from last week. During the survey period, silver prices fell below $19.00 an ounce and tested support at $18.00 an ounce.
Analysts note that silver is much more sensitive to growing recession fears. Lower economic activity would lead to weak industrial demand for the precious metal. Almost 60% of silver demand comes from industrial applications.
Although sentiment remains bearish on silver, some analysts said it could be the first to rise if sentiment begins to change. There are some preliminary signs of a bottom in industrial metals such as copper.
For the first time in four weeks, volatile copper prices attracted some bullish attention from hedge funds.
Copper’s split report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 1,091 contracts to 39,968. At the same time, short positions fell by 7,295 contracts to 58,309.
Its position in the copper market remains bearish, but its net short position increased to 18,341 contracts, up nearly 46% from the previous week.
Although there is some optimism in the market, some analysts still see a difficult environment for copper in the near term.
“Our commodity quants showed the red metal as the most vulnerable metal in the cluster, showing strong asymmetry to downside moves in demand signals. While we believe demand signals may have been distorted by commodity capital hitting every asset in the cluster, the red metal has succumbed to significant short-term buying and selling over the past week,” TDS analysts said.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided. However, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation for any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.
