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Fund managers cut bullish gold positioning before prices bounce Monday

Kitco News

(Kitco News) - Money managers began liquidating bullish gold positions during the most recent reporting week for data compiled by the Commodity Futures trading Commission, then the trend likely continued through the end of last week as prices tumbled.

The market is finally attempting to right itself Monday, however, with gold trading higher as of mid-morning.

The net-bullish position as of the Feb. 25 cutoff for the most recent CFTC data showed that speculators had begun moving out of gold, even though the metal had hit a seven-year high the day before. The price slide accelerated, with a sharp sell-off on Friday.

“We would expect to see a reduction in length in futures positions as funds looked for liquid assets to sell,” said a research note from BMO Capital Markets.

BMO and Commerzbank both pointed out that exchange-traded-fund holdings of gold actually rose on Friday despite the big price sell-off.

“Selling is likely to have taken place almost solely via the futures market, where Friday’s trading volume was nearly twice as high as this year’s average,” said Commerzbank analyst Daniel Briesemann. “There were close to 2,500 tons of gold traded on the futures market at the end of last week. Alongside selling designed to cover margin calls on other markets, technical selling is also likely to have dragged the price down after it fell below key technical thresholds.

“By contrast, the gold ETFs tracked by Bloomberg registered sizable inflows of a good 9 [metric] tons.”

During the week-long period to Feb. 25 covered by the last CFTC report, Comex April gold rose $46.40 to $1,650 an ounce. However, a pullback began the day before the cut-off for the data, when April gold had traded as high as $1,691.70. By the end of last week, it had been as low as $1,564.

During the CFTC reporting week to Feb. 25, May silver ticked up 3.5 cents to  $18.268. This contract peaked at $19.005 on Feb. 24 before beginning to pull back, bottoming Friday at $16.457.

However, gold and silver are bouncing Monday morning. As of 10:20 a.m. EST, Comex April gold was up $31.70 from Friday’s settlement to trade at $1,598.40 an ounce. May silver was 22.8 cents higher at $16.685.

“The gold price this morning has recovered again to around $1,600 following verbal interventions from the U.S. Federal Reserve and the Bank of Japan,” Briesemann said. “In a statement, Fed Chair [Jerome] Powell more or less announced a rate cut. Market participants are now speculating whether the Fed will wait until its next regular meeting in the middle of this month before lowering interest rates, and wondering how high the rate cut will be (25 or even 50 basis points).”

Net long or short positioning in 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’s “disaggregated” report showed that money managers trimmed their net-long position 230,846 futures contracts as of Feb. 25 from 238,546 the week before, which in turn had been a 22% increase from the prior week. During the most recent reporting week, the selling in the form of long liquidation (decline of 15,068 gross longs) outpaced the short covering (decline of 7,368 total shorts).

“Despite fears of global pandemic and a sharp correction in equity markets, speculators rushed to the exits in gold, cutting both their longs and shorts,” said TD Securities. “We cautioned that the risk of a pullback was as high as it’s ever been, with more traders long than ever, each of whom held an outsized position, leaving nearly no traders left short.

“Notwithstanding, by week's end, gold prices collapsed as the bullish gold narrative had reached widespread consensus – in this context, the carnage in equity markets prompted liquidity-seekers to sell gold, ultimately catalyzing a rush to the exits.”

Money managers also trimmed their bullish stance in silver to 61,689 futures contracts from 65,952 the week before. There was long liquidation, as bulls exited gross bullish trades by 2,259 lots. Unlike gold, however, there was also fresh selling, as gross shorts increased by 2,004 lots.

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