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Hedge funds scrambling for gold as an inflation hedge

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(Kitco News) - The growing inflation threat has shifted sentiment in the gold market, with hedge funds significantly increasing their bullish precious metals bets to protect their wealth, according to analysts after reviewing the latest data from the Commodity Futures Trading Commission (CFTC).


The CFTC disaggregated Commitments of Traders report for the week ending Nov. 9 showed money managers increased their speculative gross long positions in Comex gold futures by 31,189 contracts to 168,133. At the same time, short positions dropped by 9,182 contracts to 41,523.

Gold's net length now stands at 125,610 contracts, up more than 47% compared to the previous week. Gold's net length now stands at its highest level since early July 2020.

According to analysts at Société Générale, gold saw its third-largest bullish inflows on record.

"The Fed seems determined to keep rates low until labor market conditions improve. This choice is now casting doubt upon the central bank's willingness to control inflation, described as "transitory" multiple times by Fed officials," the analysts said.

During the survey period, gold prices pushed above $1,800 an ounce, reaching their highest level in more than two months.

"Speculators rushed into gold futures as real yields dropped and the dollar softened ahead of last Wednesday's white-hot CPI print," said Ole Hansen, head of commodity strategy at Saxo Bank.

Hansen noted that the latest Commitment of Traders report came before October U.S. Consumer Price Index, which showed inflation rise to 6.2%, the highest level in more than three decades.

"The subsequent rally to the current level around $1870 has undoubtedly resulted in more length being added," he said.

Hansen added that while the gold market has significantly improved, more work needs to be done.

"The dollar still strengthening and yields showing signs of rising, the metal needs to break higher soon in order to avoid selling from recently established longs," he said.

Daniel Briesemann, precious metals analyst at Commerzbank, noted that the inflation threat is helping the gold market rally in the face of a stronger U.S. dollar and rising bond yields.

"The picture on the gold market appears to have changed completely since the U.S. inflation data were published last week – if not before. Ever since gold has been living up to its reputation as a store of value and is in demand accordingly," he said.

However, Briesemann also highlighted some caution in the gold market.

"The question now is how lasting this upswing will prove and whether gold will come under pressure in the event of profit-taking," he said.

Some analysts have also noted that while bullish speculative bets have jumped higher in recent weeks, demand for gold-backed exchange-traded products has remained lackluster.

Bullish sentiment is also picking up in the silver market as money managers drop their bearish bets.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures increased by 559 contracts to 50,950. At the same time, short positions fell by 2,720 contracts to 23,702.

Silver's net length stands at 27,248 contracts, up more than 13% compared to the previous week. 

During the survey period, silver prices managed to hold support above $24 an ounce. Following the latest survey, silver's market has improved, with prices pushing above $25 an ounce, hitting a three-month high.

Commodity analysts remain bullish on silver in the long term. Many analysts have said global government initiatives to build new green energy infrastructure will increase demand for the precious metal.

While the bullish sentiment is building in the precious metals market, industrial metals like copper are seeing new bearish bets among hedge funds. Some analysts have noted that softer economic activity in China is weighing on demand for copper.

"The extreme backwardation in copper is subsiding as inventories trickle into exchange warehouses," said commodity analysts at T.D. Securities. "This reflects a continued easing in metals supply risk as China's crackdown on coal reverberates across the industrial metals complex."

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures fell by 6,280 contracts to 60,874. At the same time, short positions rose 4,740 contracts to 36,954.

Copper's net length is currently at 23,920 contracts, falling 31.5% from the previous week. Copper prices saw were relatively stable during the survey week as prices remained below $4.40 per pound.

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