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U.S. dollar strength prompts hedge funds to drop bullish gold bets

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(Kitco News) - The U.S. dollar appears to be losing the race to the bottom in currency markets, which prompted some hedge fund managers to reduce their bullish exposure in gold, triggering a strong selloff in the yellow metal, according to some analyst.

The latest trade data from the Commodity Futures Trading Commission (CFTC) shows that net bullish bets in the gold market dropped to their lowest level in roughly 15 months.

CFTC disaggregated Commitments of Traders report for the week ending Sept. 22 showed money managers lowered their speculative gross long positions in Comex gold futures by 21,901 contracts t0 144,670. At the same time, short positions increased by 7,749 contracts to 63,222.

Gold's net length now stands at 81,448 contracts, down nearly 27% from the previous week. During the survey period, the long liquidation pushed gold prices to support levels just above $1,900 an ounce. Since the end of the survey period, gold prices have lost further ground falling to a two-month low.

Although gold prices have seen some significant selling pressure, analyst do see a silver lining in the price action. Many analyst have said that the drop in speculative longs is helping to shakeout "weak hands" in the marketplace, allowing gold to build a strong base from which to rally off of.

Analysts have said that even during gold's consolidation between $1,900 and $2,000 the precious metal was overbought.

"Considering that positioning remained bloated, adding some fuel to the pain trade lower in prices, the yellow metal traded through support into a new range, thereby prompting money managers to aggressively liquidate their length," said analysts at TD Securities in a report Friday. "However, it is worth highlighting that traders also added some shorts — signaling the return of some healthy skepticism in the gold market."

Ole Hansen, head of commodity strategy at Saxo Bank, said in a report Monday that although gold has fallen below $1,900 an ounce, it is still holding critical support levels. However, he also added that he can't rule out another drop, especially if the U.S. dollar continues to push higher.

"The short-term technical and fundamental outlook is somewhat challenged until yields and dollar stabilize," he said. "Gold, however still trades above key support at 1837/oz, the 38.2% retracement of the March to August rally."

Commodity analysts at Scotia Bank said in a report Monday that gold's weak performance is more due to perception rather than reality. They are looking past gold's short-term volatility.

"More recent selling pressure looks to reflect perceptions of relative rather than absolute risk in foreign exchange markets, which are bidding up the U.S. dollar," they said. "Medium-term yellow metal fundamentals remain constructive. In particular, the Federal Reserve's stated tolerance for stronger inflation, though subject to implementation challenges, has the potential to weigh on US real rates."

It wasn't just the gold market that saw significant long liquidity. Hedge funds have also been quickly to ditch their bullish bets in silver and have added some short bets.

The disaggregated report showed money-managed speculative gross long positions in Comex silver futures fell by 1,700 contracts to 61,547. At the same time, short positions rose by 1,070 contracts to 25,052.

Silver's net length currently stands at 36,495, down 7% from the previous week.

During the survey period silver prices dropped 14.5%.

"The 7% reduction in speculative net long positions in silver was less pronounced than the sharp price fall might have suggested, on the other hand. However, net longs may well have been cut further after the reporting date last Tuesday," said commodity analysts at Commerzbank.

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