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Hedge funds cover bearish gold bets; push prices to $1,900 as inflation threat rises

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(Kitco News) - Rising inflation pressures continue to support gold prices, forcing hedge funds and investors to cover their short bets, according to the latest data from the Commodity Futures Trading Commission.

Renewed speculative interest has pushed gold prices to $1,900 an ounce and the precious metal is on the cusp of turning positive for the year. With gold's new momentum, many market analysts and investors are calling for prices to push to $2,000 an ounce by the end of the year.

The CFTC disaggregated Commitments of Traders report, for the week ending May 25, showed money managers increased their speculative gross long positions in Comex gold futures by 2,086 contracts to 143,862. At the same time, short positions fell by 13,179 contracts to 36,607.

Speculative interest in gold has risen for four consecutive weeks. Gold's net length currently stands at 107,255 contracts, up nearly 17% from the previous week.

Analysts at Commerzbank said that gold's net length is at its highest level since early January. The analysts added that they see the potential for further growth in bullish speculative interest.

"Net longs have more than doubled in the past four reporting weeks. This is equivalent to purchases of 176 tons. Net long positions are still not at an unusually high level, so there can be no talk of any excess, and a further increase in positions would not pose any problem," the analysts said in a report Monday.

Although bullish sentiment in gold continues to grow, analysts at TD Securities warn that the market could be at the start of a new crossroads as inflation fears could push the Federal Reserve to tighten its ultra-loose monetary policy sooner than expected.

"With investors sounding the alarm over inflation, institutional interest in the precious metals complex is also still rising, providing an offsetting force against taper fears for the time being. However, if inflation is the smoke, economic momentum is the fire that creates it. In this sense, the mounting pile of evidence that we have reached peak economic momentum raises the risk that discretionary flows to gold could dry up in the near-term," the analysts said in a report Friday.

"However, if inflation is indeed transitory, then we are likely to see a prolonged period of uber-easy monetary policy, which suggests that market pricing for Fed hikes is too hawkish and ultimately that gold prices could firm further.

Although the gold market is starting to fire on all cylinders, the silver market continues to struggle.

The disaggregated report showed money-managed speculative gross long positions in Comex silver futures fell by 1,056 contracts to 72,629. At the same time, short positions increased by 289 contracts to 28,963.

Silver's net length now stands at 43,666 contracts, down another 3% from the previous week.

During the survey period, prices fluctuated around support at $28 an ounce.
According to some analysts, silver continues to struggle as falling base metal prices highlight weakening industrial demand.

High-grade copper futures continue to hold above critical support around $4.50 per pound; however, the latest trade data showed a sharp reduction in speculative bullish bets.

The disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures fell by 14,008 contracts to 70,997. At the same time, short positions fell by 3,635 contracts to 37,949.

Copper's net length currently stands at 33,048 contracts, down nearly 35% from the previous week.

Ole Hansen, head of commodity strategy at Saxo Bank, said bullish copper bets are at their lowest point since July.

"The main culprit behind the reduction and copper's recent 9% correction being China's attempt to curb commodity prices and hoarding in the domestic market. An attempt both Goldman Sachs and Citigroup expect will fail due to the speed of the rebound in demand in advanced economies, particularly the U.S.," he said.

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