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Hedge funds reduce bullish bets in gold futures but buy ETFs

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(Kitco News) - Once again, there is a growing divergence in the gold space as a hawkish Federal Reserve drives hedge funds from their bullish speculative positioning; however, analysts note that the shift in speculative bets is offset by strong physical demand and rising interest in gold-backed exchange-traded funds.

Commodity Futures Trading Commission's weekly disaggregated Commitments of Traders report for the week ending March 29 showed money managers lowered their speculative gross long positions in Comex gold futures by 6,103 contracts to 146,486. At the same time, short positions rose by 727 contracts to 38,184.

Gold's net length now stands at 108,302 contracts, down nearly 6% from the previous week. Gold's net length has dropped for four consecutive weeks, falling to the lowest point since early February. During the survey period, gold prices remained broadly range-bound between $1,950 and $1,900.

Analysts have said that hedge funds are liquidating their bullish bets as the Federal Reserve looks to aggressively tighten its monetary policy. Markets are pricing in two 50-basis point hikes in the first half of this year.

"The market anticipates rate hikes totaling 125 basis points at the next three Fed meetings and over 200 basis points by the end of the year," said Daniel Briesemann, precious metals analyst at Commerzbank, said a note Monday.

"The withdrawal of speculative financial investors is probably one reason why the gold price has fallen significantly from its early-March high and has been trending largely sideways between $1,900 and $1,950 since mid-March: they slashed their net long positions by 24% in the past three CFTC reporting weeks," he added.

Commodity analysts at Société Générale also noted that Russia's comments about de-escalating its war in Ukraine had taken some safe-haven luster away from the precious metal.

Globalization is dead and that will lead to higher gold prices - abrdn's Minter

However, while hedge funds reduce their exposure in the futures market, investors are piling into different forms of paper gold and precious metals.

"ETF investors are remaining loyal to gold, on the other hand," Breisemann said.

Analysts note that demand for gold-backed exchange-traded funds has risen sharply, seeing inflows for the last 10-consecutive weeks.

Commodity analysts at European precious metals firm Heraeus said that 7.7 million ounces of gold have flowed into ETF markets in the last 10-weeks.

"This has been the longest streak of weekly gains in ETF holdings since March to August 2020," the analysts said.

Investors have also been piling into the physical metal. The U.S. Mint said that it sold 155,000 ounces of various denominations of its American Eagle Gold bullion coins, up 73% from last month. This was the best March for the mint since 1999.

While gold continues to benefit from mixed investment sentiment in the marketplace, silver suffers from a lack of conviction. The latest trade data shows that hedge funds are reducing their entire exposure to the precious metal.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 3,226 contracts to 54,378. At the same time, short positions fell by 1,529 contracts to 12,247.

Silver's net length stands at 42.131 contracts, down nearly 4% from the previous week. The silver market saw some brief selling pressure during the survey period, which pushed prices to support just above $24 an ounce.

Analysts have said that while silver looks good as a monetary metal, it could struggle as slowing global economic growth weighs on its industrial demand.

"Unlike gold ETFs, silver ETFs have been subject to outflows. Last week, holdings lost 3.0 [million ounces]. That brought total outflows for March to 12.8 moz," said commodity analysts at Heraeus. "If the price is to make further gains, stronger investor interest will be needed."

Global growth concerns aren't impacting all industrial metals equally. Hedge funds increased their bullish bets in copper last week.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 4,428 contracts to 70,677. At the same time, short positions fell by 386 contracts to 29,983.

Copper's net length is currently at 40,694 contracts, up 13% from the previous week. During the survey period, copper prices held critical support above $4.70 an ounce.

Analysts have said that potential supply disruptions continue to support the industrial metal in the near term.

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