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Bearish Gold Positioning Expands; Is It Time For A Bounce?

Kitco News

(Kitco News) - Money managers have moved to a large net bearish position in gold futures, but some analysts are suggesting this may be a sign of an overextended market that could be ripe for some kind of bounce.

Selling by these accounts pushed gold sharply lower during the week-long period to July 17 covered by the most recent positioning data compiled by the Commodity Futures Trading Commission. Comex August gold fell by $28.10 an ounce to $1,227.30, while September silver shed 47 cents to $15.617.

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 poised for price corrections.

TD Securities issued a research note saying that speculators “have continued to shun gold” due to a resilient U.S. dollar and emerging-market foreign-exchange “angst” as the People’s Bank of China continues to allow the country’s currency to depreciate to offset economic headwinds in China.

The CFTC’s “disaggregated” report shows that money managers stood net short by 26,449 contracts as of July 17, compared to a net short of 2,527 at the end of the prior reporting week. This big change was the result of fresh selling, as the number of shorts soared by 24,295 lots. There was also some fresh buying, as reflected by a 373 increase in gross longs.

“Just as I suspected; it was short traders driving gold down,” said a tweet from Fred Hickey, editor-creator of The High-Tech Strategist.

Commerzbank analysts pointed out that gold hit the lowest price in a year in a slide exacerbated by speculative traders. The net-short position is near the late 2015 record high, the bank added, while also suggesting the market may have reached an extreme that could lead to a bounce.

“Speculative market participants often behave in a very cyclical fashion, and in the past such extreme positioning has frequently been an indicator of a pronounced countermovement in the near future,” Commerzbank said. “Very negative market positioning at the end of 2015 was followed by a surge in the gold price of roughly $300 in the first half of 2016.”

Alasdair Macleod, head of research at Goldmoney, echoed similar sentiments in this tweet: “Gold as oversold as it has ever been. Last time this happened was 29 Dec 2015 and was followed by $315 [rise] to $1366 over 7 months.”

Commerzbank noted that speculative financial investors are also pessimistic about the other precious metals and flipped back to a net-short in silver.

Money managers now hold a net-short position of 8,810 futures contracts, compared to a net-long standing of 7,827 in the prior week. This reversal was due to a combination of fresh selling (gross shorts rose by 10,247 lots) and long liquidation (total longs fell by 6,390).

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.