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Hedge funds turn bullish on gold but remain heavily bearish on silver

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(Kitco News) - Hedge funds have been quick to take profits and cover their short positions in the gold market as the U.S. dollar appears to have topped out after hitting a 20-year high.

Not only did a weaker U.S. dollar help to shift sentiment in the gold market, but falling bond yields, as recession fears grow, have also supported the precious metal, according to some analysts.

"The DXY index dropped 1.45%, the largest such weekly drop since July 2020, making the yellow metal more appealing. 10-year real rates slightly decreased by 6bp, decreasing the opportunity cost to hold non-yielding assets such as gold," said commodity analysts at Société Générale in a note Monday.

The French bank noted that the gold market saw $3.3 billion in bullish flows last week.

The CFTC disaggregated Commitments of Traders report for the week ending May 24 showed money managers increased their speculative gross long positions in Comex gold futures by 5,602 contracts to 121,174. At the same time, short positions fell by 12,095 contracts to 60,117.

Gold's net length now stands at 61,057 contracts, up nearly 41% from the previous week. The shift in speculative interest ended a five-week increase in bearish positioning. During the survey period, gold prices managed to push back above $1,850 an ounce, but prices have stalled since last week's move.

Some analysts have said that gold's recent price action is not surprising; it was technically oversold after falling below $1,800 an ounce in mid-May.

"Net-long exposure to gold futures have been trending lower since the middle of March. However, whenever it has pulled back to the 170-180k area, it has marked a low before moving higher once more. Two weeks ago, it had fallen to 175k and moved higher to 183k contracts and prices have also risen. We, therefore, suspect the correction in oil is now complete," said Matt Simpson, senior market analyst at City Index.

Will gold price benefit from classic bear market rally in equities?

However, not all analysts are optimistic that gold prices are ready to move higher, as the U.S. dollar could just be experiencing a short-term correction.

Bart Melek, head of commodity research at TD Securities, said that he still likes to sell rallies in the gold market as the Federal Reserve is expected to aggressively rate interest rates through the summer.

"It should be noted that specs have plenty of room to take on new short exposure and reduce long positions," he said on Friday.

While speculative sentiment in the gold market has turned bullish, hedge funds added to their bearish bets in silver.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 736 contracts to 41,545. However, short positions also rose by 1,922 contracts to 42,404.

Silver's positioning is now net short by 859 contracts. Net bullish positioning has fallen for six consecutive weeks. This is the first time the silver market has been net bearish since earl-June 2019.

However, the speculative positioning has not significantly impacted prices, with silver pushing above $22 an ounce during the survey period.

Analysts have noted that the silver market struggles as weak demand for base metals impact its industrial interest.

Some analysts have said that copper prices need to stabilize before silver can find a bottom. This scenario could soon be in the cards as hedge funds covered their aggressive copper short positions.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 922 contracts to 41,616. At the same time, short positions fell by 5,483 contracts to 54,630.

The copper market's net short positioning now stands at 13,014.

During the survey period, copper prices managed to push above $4.30 a pound.

However, commodity analysts at TD Securities warn that the industrial metal is still in a precarious situation.

"On the surface, all systems are go with risk-on, the broad-based dollar melting and Beijing easing Covid-19 curbs all supporting a recovery in LME metals prices. Behind the curtains, however, our gauge of metals supply risk has collapsed; our tracking of Shanghai participants reveals substantial selling flow from China's top participants in copper," the analysts said in a report Monday. "

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