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Funds Hold Record Net Short In Gold; Short Covering Coming?

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(Kitco News) - Fund managers increased their net bearish positioning in gold and silver futures as the amount of fresh selling overwhelmed fresh buying, according to the most recent weekly data from the Commodity Futures Trading Commission.

In fact, these accounts now hold a record bearish position in gold futures, numerous analysts pointed out.

“Speculative financial investors are thus continuing to contribute significantly to the fall in precious-metals prices,” said Commerzbank.

Conversely, however, several analysts commented this means there is a potential for a short-covering rally. This is when traders with bearish positions offset them by buying, either to capture profits or avoid/limit a loss.

The most recent CFTC report covers the week-long period to July 24. During this time frame, Comex December fell $3.20 to $1,234.60 an ounce. Further, during this reporting week, the contract bottomed at $1,221, its weakest level in more than a year. Meanwhile, September silver lost 9.7 cents to $15.52 an ounce during the week to July 24.

Net long or short positioning in the CFTC data reflect the difference between the total number of bullish (long) and bearish (short) contracts. Traders monitor the data to gauge the general mood of speculators, although excessively high or low numbers are viewed by many as signs of overbought or oversold markets that may be ripe for price corrections.

“The CFTC reported on Friday that short positions in gold hit a record high, while silver shorts rose to a 10-week peak,” said Edward Meir, commodities consultant with INTL FCStone.

The CFTC’s “disaggregated” report showed that managed-money accounts upped their net-short position in gold futures to 36,422 contracts from 26,449 the week before.

“The gross-long rose for the first time in six weeks but was more than offset by a continued extension of the gross short…,” said Ole Hansen, head of commodity strategy at Saxo Bank.

Total shorts rose by 12,447 lots and outpaced the fresh buying, with the latter reflected by an increase of 2,474 gross longs.

The net-bearish positioning “brings a high risk of short covering, which could bring upside to prices,” said Jonathan Butler, precious-metals strategist with Mitsubishi.

A TD Securities research note pointed out that continued weakness in the currency of China, the world’s biggest gold-consuming nation, has contributed to further weakness in gold. A strong U.S. dollar generally has also hurt gold for weeks now.

“But, with [U.S. President Donald] Trump criticizing increased rates and a strong dollar, the buck's upside could be running out of steam, while the outcome of the meeting with [European Commission President Jean-Claude] Juncker ended with a more encouraging sentiment surrounding trade and potential auto tariffs,” TDS said. “Indeed, should the dollar's rally cool off in the second half of the year as we anticipate, the precious-metals complex could receive a hefty boost as the record short positions get squeezed out. For now, continued weakness in the CNH [China’s currency] should also prevent any near-term rallies.”

Meanwhile, in silver futures, the net-short position of money managers rose to 12,634 contracts from 8,810 the week before. This occurred as the number of total shorts rose by 5,927 lots, exceeding the increase of 2,103 gross longs.

Nevertheless, the silver net short remains below the record level hit earlier this year, Hansen pointed out. “Despite [silver] having the worst run of weekly losses since 2000, silver sellers remain reluctant,” the analyst added.

Butler commented that the number of speculators on the bullish side of the silver market actually remains “quite healthy,” based on historical data. However, this has been more than offset lately by a large number of bearish positions that he said were at an all-time high.

“As with all the other precious metals, such extremes on the short side bring an elevated risk of short covering, which would be supportive of silver prices,” Butler 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 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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