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Gold, Silver At Extreme Bearish Positioning; Analysts See Short-Covering Potential

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(Kitco News) - For the fifth week in a row, hedge funds reduced their bullish exposure to gold and have turned outright bearish on silver, according to the latest trade data from the Commodity Futures Trading Commission.

The Disaggregated Commitments of Traders report for the week ending July 11 showed money managers cut their speculative gross long positions in Comex gold futures by 6,161 contracts to 123,619. At the same time, short bets increased by 4,306 contracts to 100,397. Gold’s net length now stands at 23,222 contracts.

Gold’s net length dropped 31% from the previous week. According to the data, gold’s bullish positioning is at its lowest level since January 2016. The increased selling pressure caused gold prices to push to a four-month low during the survey period.

However, despite the strong selling momentum, gold found some support later in the week, which was not included in the latest trade data. Joni Teves, strategist at UBS, said that gold’s extreme positioning highlights further upside risk in the near-term.

“Gold positioning has declined by as much as 69% or a total of 15.55moz over the past  five  weeks  and  now  looks  very  light  at  only  19%  of  the  all-time  high,” she said. “This  sharp  increase  in  short  positioning  over  a  relatively  short  period of  time,  which  effectively  makes  the  market vulnerable  to  upside  risks,  was  reflected  in  gold's  swift  bounce  towards  $1230  last Friday following  soft  US  data.”

Bart Melek, head of commodity strategy at TD Securities, agreed that gold could have further room to run higher in the near-term as investors readjust their interest rate expectations.

“We expect gold will continue to keep investor interest and perform well in the second half of the year,” he said.

Gold isn’t the only precious metal that could benefit from short-covering. Silver, which is now net short, could benefit from shifting sentiment, said Teves.

“Similar  to  gold,  positioning  in  silver  has  been  cut  consistently  since mid-June, declining by 67% or a total of 254moz over this period. But unlike gold, the selling  in  silver  has  mainly  been  due  to  short  selling  throughout  – silver  gross  shorts  have increased by a total of 219moz over the past five weeks, to reach a fresh all-time high  of  470moz  on  July  11,” she said. “We  think  this  creates  near-term  upside  risks  for  silver  especially  in  terms  of  its  relative  performance  to  gold.”

The disaggregated report showed money-managed speculative gross long positions in Comex silver futures fell by 4,099 contracts to 55,697. At the same time, short positions increased by 3,428 contracts to 62,058. The market is now net short by 6,361 contracts.

This is the first time the silver market has been net short since August 2015. The selling pressure caused the grey metal to slip below $16 an ounce, to a one-year low, during the survey period.

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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