Money Managers Hike Bullish Gold Positioning; Some Fear Price Correction
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(Kitco News) - Large speculators upped their bullish positioning in gold futures sharply for the third straight reporting week for data compiled by the Commodity Futures Trading Commission, but the net long has risen so fast that some market watchers now wonder if gold prices might not be due for a correction lower.
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 disaggregated report shows that money managers further hiked their net long to 129,160 futures contracts from 96,182 contracts the week before, which in turn had been more than triple from 26,274. The bulk of the most recent increase was short covering, as reflected by a decline of 23,001 gross shorts. However, there was also fresh buying, with the number of total longs increasing by 9,977.
“Gold specs increased net length as weak jobs and inflation data, along with [Federal Reserve Chair Jerome] Powell's nod toward a willingness to cut rates, saw the market firmly betting on interest-rate cuts,” said TD Securities.
Ole Hansen, head of commodity strategy at Saxo Bank, cited a shift in the commodities that investors were favoring, with gold a winner.
“Macroeconomic uncertainties weighed on growth-dependent commodities from energy to industrial metals while at the same time supporting another strong week of gold buying,” he said.
Analysts with Commerzbank pointed out that the third straight large rise in bullish gold positioning means the net long is now the highest since April 2018.
“The risk of profit-taking and a price correction has increased considerably of late because the previous price rise was driven largely by speculation,” analyst said.
Some commented that one catalyst for a potential retreat in prices would be if the Federal Reserve ends up not being as dovish as the market was expecting. A two-day meeting of policymakers ends on Wednesday. While most market participants do not look for a rate cut this week, they will be watching to see if Fed language sets a stage for a potential cut at the next meeting.
“The biggest short-term risks to gold bulls are the potential for the U.S. Federal Open Market Committee proving unwilling to meet the market’s expectations for aggressive rate cuts leading to a stronger dollar and/or a surprise trade deal announcement when [U.S. President Donald] Trump and [Chinese President] Xi [Jinping] meet at the G20 [Group of 20] in Osaka June 28-29,” Hansen said.
Still, others see potential for gold to keep rising even if the Fed is not immediately dovish.
“While the market expectations are lopsided and lean strongly toward a rate cut, gold could still post a respectable performance as any disappointment from the Fed could see safe-haven demand amid equity fears to offset the normalization in rate-cut expectations,” TDS said. “As such, moving forward we expect investors will continue to increase gold allocations, taking more of a shine to the yellow metal as late-cycle recession worries mount.”
Hansen commented that gold needs to break above its “wall of resistance” soon in order to avoid a pullback as a result of recently established longs getting nervous. The fact that much of the build in net length was due to short covering highlights hesitancy of bulls to get too aggressive ahead of key resistance, with some momentum buyers “keeping their powder dry” until perhaps after a break above $1,380, he continued.
“On that basis, we are now witnessing a battle between strategic buyers versus tactical short sellers,” Hansen said. “A draw between the two is likely to be seen as long gold stays within a $1,320/oz to $1,358/oz range.”
In silver, money managers continued to whittle down their net-short exposure. This now stands at 8,060 futures contracts, compared to 19,536 and 38,007 lots the prior two weeks.
The net short is declining, yet futures traders are still “struggling to get excited about the white metal despite trading at the lowest level [relative] to gold in 26 years,” Hansen said.
The bulk of the decline in the net short was due to fresh buying, with total longs rising by 8,560 contracts. There was also short covering, with gross shorts declining by 2,916.