Gold and Precious Metals

Inflation fears force hedge funds to ditch gold, increase bearish bets in silver

(Kitco News) – Gold and silver continue to defy the odds as the precious metals hold critical support even as inflation fears prompted hedge funds to liquidate their bullish positionings and increase their speculative bets, according to the latest trade data from the Commodity Futures Trading Commission.

Commodity analysts at Société Générale noted that the gold market led speculative outflows in the commodity space last week as $6.9 billion fled the precious metal.

The CFTC’s disaggregated Commitments of Traders report for the week ending Feb. 13 showed money managers decreased their speculative gross long positions in Comex gold futures by 13,674 contracts to 100,642. At the same time, short positions increased by 20,219 contracts to 66,466 contracts.

The gold market is now net long by only 34,176 contracts as bullish speculative positioning falls to its lowest level since Oct. 16. Although bullish interest in gold continues to weaken, the price continues to hold critical support at $2,000.

Bearish momentum in gold picked up last week after the U.S. Labor Department said that its Consumer Price Index rose more than expected, increasing 3.1% in the 12 months to January. Inflation was hotter than expected, as economists were expecting the annual CPI to rise 2.9%.

Renewed inflation fears caused markets to push back the timing of a potential rate cut from the Federal Reserve. A March rate cut has been pretty much priced out of the market and there is less than 50% chance of easing in May.

Although gold prices have room to move lower, analysts see a relatively solid floor in the market as the Federal Reserve is expected to eventually ease its monetary policy.

“We have highlighted on several occasions in recent months that both [gold and silver] are likely to remain stuck until we get a better understanding about the delivery of future U.S. rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction,” said Ole Hansen, head of commodity strategy at Saxo Bank, in a comment to Kitco News Friday.

At the same time, while lackluster Western investment demand keeps a lid on prices, Hansen noted that the market continues to be supported by robust Asian demand.

“Gold will likely struggle in the short term, but as the rate cut expectations are being dialed back, but overall, I look forward to seeing how Chinese investors respond to slightly lower prices next week. I believe the physical demand from central banks and retail investors, not least in China, will continue to provide a soft floor under the market,” he said.

Commodity analyst at TD Securities said that the gold market is building momentum for a potential short squeeze as macro traders are under-positioned for the Federal Reserve’s easing cycle.

“This highlights a set-up for the yellow metal that is ripe with asymmetry and prone to a material short squeeze as Fed officials contemplate the start of a cutting cycle. In this sense, algorithmic selling exhaustion has already morphed into buying activity, adding pressure on macro trader shorts,” the analysts said.

Along with gold, silver has also struggled as potentially higher for longer interest rates pushes the market into bearish positioning.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 903 contracts to 33,004.  At the same time, short positions rose by 5,287 contracts to 41,987 contracts.

Sentiment in the silver market pushed further into bearish territory by 8,983 contracts. Speculative short positioning has risen to its highest level since early March 2023.

Despite the bearish sentiment, silver prices held critical support at $22 an ounce. The precious metal bounced off a three-month low to end last week with nearly a 7% gain.

Although interest rate expectations are weighing on silver, some analysts have said that silver is a more attractive inflation hedge than gold and could start to outperform the yellow metal.

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 accuracy of 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 to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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