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Hedges funds ditch bullish gold bets as Fed faces rising inflation threat

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(Kitco News) - Hedge funds and money managers continue to liquidate their bullish gold bets as the Federal Reserve looks to fight the growing inflation threat by tightening monetary policy faster than expected.

According to the Commodity Futures Trading Commission (CFTC), bullish speculative interest in gold has fallen to a one-month low as prices are unable to hold gains above $1,800 an ounce.

The CFTC disaggregated Commitments of Traders report for the week ending Nov. 30 showed money managers reduced their speculative gross long positions in Comex gold futures by 14,804 contracts to137,469. At the same time, short positions dropped by 1,550 contracts to 45,384.

Gold's net length positioning is now at 92,085 contracts, down 12.5% from the previous week. The gold market was relatively volatile during the survey period as prices briefly pushed above $1,800 an ounce but could not withstand new selling pressure.

Gold is stuck between these two forces, prices to climb towards $1,900 in Q1 2022 – Standard Chartered

Nicky Shiels, head of metals strategy MKS PAMP GROUP, said the gold market had seen 5 million ounces of outflows in the last two weeks.

"The last time longs had such little staying power, was Feb 2020 when positioning was near the highs and they (smartly) sold early ahead of COVID," she said in a report Monday.

Shiels added that gold investors are also fleeing gold-backed exchange-traded products along with long liquidation in CME futures.

"The past two days have printed outflows of 125K oz and ~200K oz, adding some apprehension to any bullish views, especially into yearend when holdings are relatively more fickle," she said.

Ole Hansen, head of commodity strategy at Saxo Bank, noted that gold is failing to attract any bullish attention as rising inflation is raising expectations that markets will raise interest rates more aggressively next year.

Not only do markets expect the Federal Reserve to start tightening interest rates by June, but they see four rate hikes coming next year, according to the latest data from the CME FedWatch Tool.

However, not all analysts are giving up on gold. Commodity analysts at TD Securities noted that the market's expectations for rate hikes next year are overdone, which could be positive for gold prices.

"With both an accelerated taper and more than three rate hikes priced in for 2022, the balance of risks for gold positioning is shifting to the upside," the analysts said. "CTA short-covering could ultimately catalyze higher gold prices, should prices break north of $1795/oz."

While gold cannot attract bullish investors' attention, the silver market appears to be in a little worse shape as hedge funds lower their overall exposure to the precious metal.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 5,837 contracts to 48,877. At the same time, short positions also dropped by 3,548
contracts to 21,353.

Silver's net length now stands at 27,524 contracts, down nearly 8% from the previous week. The silver market saw continuous selling pressure during the survey period, with prices dropping below $23 an ounce.

"Silver is underperforming on a volatility-adjusted basis as industrial headwinds sap appetite for the metal. This is in line with our view of a more vulnerable fundamental outlook," said analysts at TD Securities.

Looking at industrial metals, the copper market shows signs of consolidation even as hedge funds increase their bearish bets.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures fell by 3,883 contracts to 52,438. At the same time, short positions rose 2,231 contracts to 39,406

Copper's net length now stands at 13,032, down nearly 32% from the previous week. 

Hansen noted that copper's bullish speculative positioning is now at a three-month low. However, copper prices managed to hold support above $4.30 per pound during the survey period.

"Copper's rangebound trading behavior since July has sapped hedge funds involvement with the current net length a far cry from the 92k record peak seen this time last year," said Hansen.

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.