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Hedge funds continue to unload their bullish gold bets as Fed remains indifferent to rising bond yields

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(Kitco News) - Speculative interest in the gold market continues to sour as hedge funds reduce their bullish bets to their lowest level since May 2019, according to the latest data from the Commodity Futures Trading Commission (CFTC).

Although gold prices are starting to look a little oversold, analysts said hedge funds could continue to liquidate their long positions as prices remain below $1,700 an ounce. Analysts note that the gold market faces a challenging environment as bond yields remain elevated above 1.5%.

"In the short term, the development of U.S. bond yields and of the U.S. dollar will remain the key factor for the gold price. The Fed does not yet appear to be particularly worried about the rise in yields," said Carsten Fritsch, commodity analyst at Commerzbank, in a note to clients Monday.

CFTC disaggregated Commitments of Traders report for the week ending March 2 showed money managers decreased their speculative gross long positions in Comex gold futures by 18,516 contracts to 125,997. At the same time, short positions rose by 4,647 contracts to 60,648.

Gold's net length dropped to 45,960 contracts, down more than 32% from the previous weeks. During the survey period, gold prices tested support just above $1,700 an ounce.

Looking forward, analysts at TD Securities said they also expect gold to remain a casualty in the tug of war between the Fed and markets as bond investors continue to test the central bank's conviction.

"A dry-powder analysis of positioning suggests that position sizing has decreased substantially over the past weeks, fueled by liquidations which saw position sizing decline to its expected level. In this environment, investment flows into gold are likely to remain contained as gold-as-a-safe-haven is not compelling enough to offset the ongoing rise in real rates," the analysts said.

However, some market analysts see a silver lining in the dark clouds looming over the gold market. Fred Hickey, editor of The High-Tech Strategist newsletter, said in a Twitter post that gold's bullish positioning had dropped about 80% from its highs last year. He added that this could mean a lot of "pain" is now behind the market.

He also noted that the last time bullish sentiment was this low, the market saw a significant rally a month later.

Although Fritsch sees near-term downside risks to gold, he also said that rising inflation pressures could ignite a new rally. He added that there is a risk that the U.S. economy starts to overheat after the Senate passed the government's proposed $1.9 trillion stimulus bill.

On Saturday, President Joe Biden said that Americans could start getting a $1,400 check later this month. The Senate bill has to be reconciled with a vote from the House of Representatives.

But it's not just gold that funds are starting to cool on. Investors have also reduced their bullish bets in silver.

The disaggregated report showed money-managed speculative gross long positions in Comex silver futures fell by 3,738 contracts to 58,364. At the same time, short positions increased by 4,239 contracts to 28,839.

Silver's net length currently stands at 29,525 contracts, down nearly 24% from the previous week.

Silver prices dropped below $26 an ounce during the survey period.

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