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(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 have said that the bearish momentum in the marketplace could push prices below $1,700 an ounce.
“Investors cut net length by a very large 6% of open interest (3 million oz) as it became very apparent that real rates on the short end of the curve will continue to increase and there was little chance of upside, as nominal policy rates jumped higher and inflation expectations eroded along with the pending economic slump,” said analysts at TD Securities. “Continued Fed hikes and less economic activity should see gold length continue to erode, with prices also likely to remain under pressure in the weeks to come.
The CFTC disaggregated Commitments of Traders report for the week ending July 12 showed money managers lowered their speculative gross long positions in Comex gold futures by 11,803 contracts to 91,669. At the same time, short positions rose by 11,364 contracts to 97,802.
For the first time since May 2019, gold’s speculative positioning has turned net short by 6,133 contracts. During the survey period, gold prices tested support at around $1,700 an ounce.
“The gold market clearly turned bearish,” said commodity analysts at Société Générale.
Analysts note that gold continues to suffer as the Federal Reserve maintains its aggressive monetary policy stance. Last week markets started to price in the possibility of a full 1% rise in the Fed Funds rate after U.S. inflation rose to a 40-year high above 9%. However, expectations have come back down and markets are getting comfortable with a 75-basis point move.
Analysts have said that the Fed’s aggressive stance could push the U.S. into a recession, creating enough demand destruction in commodity markets to cool red-hot inflation pressures.
Analysts at SocGen noted that this environment is pushing up real yields and the U.S. dollar, two major headwinds for gold.
“The DXY index increased by 1.44% in the week to July 12 to 108, the highest level since 2002. U.S. real rates increased by 13bp over the same period and have been well above 50bp since mid-June, a level not sustainably seen since June 2019,” the analysts said.
The French bank noted that the entire precious metal complex saw bearish outflows of almost $4.2 billion last week, driven mostly by gold.
According to the trade data, hedge funds are still bearish on silver but are also not aggressively liquidating their bullish bets.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 227 contracts to 37,095. At the same time, short positions rose by 1,476 contracts to 47,543.
Silver’s positioning is net short 10,448 contracts, roughly unchanged from the previous week. During the survey period, silver prices dropped below $19.00 an ounce and tested support at $18.00 an ounce.
Analysts note that silver is a lot more sensitive to the growing recession fears. Lower economic activity would lead to weak industrial demand for the precious metal. Nearly 60% of silver demand comes from industrial applications.
Although sentiment remains bearish in silver, some analysts have said that it could be the first to rally if sentiment starts to turn around. There are some preliminary signs of bottoming in industrial metals like copper.
For the first time in four weeks, depressed copper prices attracted some bullish attention from hedge funds.
Copper’s disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 1,091 contracts to39,968. At the same time, short positions fell by 7,295 contracts to 58,309.
Positioning in the copper market remains bearish, but its net short positioning rose to 18,341 contracts, up nearly 46% from the previous week.
Although there is some optimism in the marketplace, some analysts still see a difficult environment for copper in the near term.
“Our commodity quantamentals pointed to the red metal as the most vulnerable metal in the complex, displaying strong asymmetry to downside moves in demand signals. While we think demand signals may have been distorted by commodity funds pummeling every asset in the complex, the red metal succumbed to significant short acquisitions and liquidations during this last week,” said analysts at TDS.
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