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Hedge funds got caught with their bearish bets on gold

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(Kitco News) - Market expectations that the Federal Reserve will act aggressively to tamp down the growing inflation threat is prompting some hedge funds to increase their bearish bets on gold, according to analysts, after reviewing the latest data from the Commodity Futures Trading Commission.

The CFTC disaggregated Commitments of Traders report for the week ending Jan. 18 showed money managers increased their speculative gross long positions in Comex gold futures by only 510 contracts to 119,807. At the same time, short positions increased by 3,027 contracts to 48,014.

Gold's net length now stands at 71,793 contracts, relatively unchanged during the survey period. Despite the rise in short bets, the gold price was relatively stable, holding well above $1,800 an ounce.

Commodity analysts at TD Securities noted that the rise in short positions last week came as yields on 10-year interest rates started to rise, with markets chatter hinting that the Federal Reserve could begin to reduce its bloated balance sheet before the end of the year and potentially raise interest rates by 50 basis points in March.


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However, TDS also noted that bearish gold investors appear to have been caught off guard as prices have risen sharply to around $1,840 an ounce, despite the rise in bond yields.

"Most investors wrongly believed that earlier price gains would be eroded ahead of the FOMC. As it stands, prices jumped to over $1,840/oz as many in the market did not believe that real rates will rise enough to prompt large sales, given a recent sharp rise in energy prices," analysts at TDS said. "We expect gold to hold near current $1,830/oz level into next week, with positioning likely moving toward the longs."

Ole Hansen, head of commodity strategy at Saxo Bank, also noted that gold is catching a bid as markets appear to be misjudging U.S. monetary policy.

"The latest move happened in response to the market, wrongly in our opinion, pricing in lower inflation expectations in the belief a succession of rate hikes signaled by the US Federal Reserve will do enough to curb inflation," he said.

Last week also saw a divergence in the gold market. Although money managers were short futures contracts, the precious metal also renewed demand for gold-backed exchange-traded funds. Friday, the world's biggest gold EFT, SPDR Gold Shares (NYSE: GLD), saw inflows of 27.6 tonnes with a market value of more than $1.6 billion dollars.

This was the biggest dollar-valued inflows since its listing in 2004.

"The growing tensions surrounding Ukraine could explain the purchase of the ETF shares, as they appear to be generating demand for gold as a safe haven. What is more, stock markets have been under pressure in recent days, making gold more attractive," said Daniel Briesmann, precious metals analyst at Commerzbank, in a report Monday.

While gold is struggling to attract new bullish attention, the silver market appears to be taking off. Some analysts have said that the rally in silver is being driven in part by new upward momentum in base metals.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 2,827 contracts to 53,143. At the same time, short positions fell by 3,087 contracts to 29,427.

Silver's net length stands at 23,716 contracts, rising more than 33% compared to the previous week.

Silver prices managed to push above $23.50 an ounce during the survey period. Since then, the silver market has seen significant momentum rising to a two-month high above $24.50 an ounce. The price appears to be finding some new support, just above $24 an ounce.
The copper market also saw increased bullish interest last week.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 2,706 contracts to 61,814. At the same time, short positions fell by 2,940 contracts to 34,024

Copper's net length is currently at 27,790 contracts, increasing more than 25% from the previous week. During the survey period, copper prices held support just below $4.40 per pound.

"We maintain a bullish outlook for copper, driven by the prospect for rising demand towards electrification, tight supplies and signs China is stepping up its policy response to support a slowing economy, thereby off-setting recent macro risks, especially those stemming from China's beleaguered property sector," said Hansen.

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