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Hedge funds avoid gold, but silver and copper shine bright as inflation threat grows

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(Kitco News) - Hedge funds remain reluctant to jump into gold; however, silver is attracting new momentum as its industrial demand picks up, according to some analysts quoting the latest trade data from the Commodity Futures Trading Commission.

Analysts have noted that rising inflation fears have sparked renewed interest in base metals; at the same time, depleted inventories as demand picks up have created a significant supply/demand imbalance. Copper and silver have both seen a rise in bullish interest as investors look for inflation hedges.

Analysts noted inflation fears are at their highest level in 16 years, indicated by five-year breakeven rates. The breakeven rate is the difference in yields between bonds and Treasury Inflation-Protected Securities (TIPS). The difference represents the inflation rate needed to equalize their returns. As of Friday, the five-year breakeven rate was 2.91, near the highest level since 2005.

The CFTC disaggregated Commitments of Traders report for the week ending Oct. 19 showed money managers increased their speculative gross long positions in Comex silver futures by 2,593 contracts to 50,040. At the same time, short positions fell by 11,788 contracts to 30,603.

Silver's net length now stands at 19,437 contracts. Ole Hansen, head of commodity strategy at Saxo Bank, noted that silver's net length has more than tripled from the previous week.

During the survey period, silver prices pushed to nearly a six-week high above $24 an ounce. Analysts expect hedge funds to have added to their bullish bets as prices have rallied above $24.50 an ounce.

Many analysts have noted that silver is being pulled up by new momentum in base metals as copper prices took a run at their record highs from May. Hedge funds increased their bullish bets in copper as inventories as London Metal Exchange warehouses dropped to their lowest levels since 1974.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 15,981 contracts to 81,574. At the same time, short positions fell by 2,567 contracts to 28,400.

Copper's net length is currently at 53,174 contracts, increasing 53% from the previous week. During the survey period, copper prices briefly rallied above $4.80 a pound.

"The red metal's particularly depleted inventory levels were a key reason why speculators targeted copper in the panic buying frenzy, but the increasingly notable demand headwinds and spreading of the energy crisis into downstream sectors can ease the upside pressure," said analysts at TD Securities.

Although copper's supply and demand fundamentals could continue to support prices, Daniel Briesemann, base metals analyst at Commerzbank, warned that the market appears to be oversold.

"Copper was also technically overbought for a time during the week under review, as can be seen from the relative strength index. This group of [speculative investors] is likely to have taken profits in the meantime, thereby contributing to the subsequent price slide," he said.

Compared to silver and copper, the gold market was extremely quiet during the latest CFTC survey period.

The disaggregated report showed that money-managed speculative gross long positions in Comex gold futures fell by 7,108 contracts to 124,560. At the same time, short positions dropped by 6,388 contracts to 66,761.

Gold's net length stands at 57,799 contracts, relatively unchanged from the past three weeks. During the survey period, goldgold prices managed to hold support above $1,750 an ounce. Still, prices were unable to break above resistance at $1,800.

Analysts have said that the gold market suffers lackluster interest as investors focus on the Federal Reserve tightening its monetary policy. The U.S. central bank is expected to reduce its monthly bond purchases before the end of the year and raise interest rates by 2022.

However, some analysts have said that rising inflation will keep real interest rates near historically low levels even as the Federal Reserve raises interest rates.

Analysts at TD Securities said that market expectations of U.S. monetary policy appear to be a little too hawkish, which could be supportive for gold.

"While gold has historically outperformed most asset classes in periods of high inflation, investors have remained cautious about the yellow metal as they remain intensely focused on the Fed's exit. In fact, speculators have only marginally added to their length in this context, despite the powerful move in inflation expectations, with modest short covering as prices edge higher. We argue that market pricing for Fed hikes has become far too hawkish, since it fails to consider that the Fed's tools are unlikely to be deployed to combat inflation tied to lingering supply chain shortages," the analysts said.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.