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.