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Gold bears are overwhelming the market place and price action

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(Kitco News) - Sentiment in the gold market has rapidly deteriorated as hedge funds have increased their bearish bets in the marketplace bringing speculative positioning close to neutral.

However, some analysts are optimistic that the rising bearish sentiment in the marketplace could signal a capitulation move, and prices might be close to a bottom.

"Last week's selloff helped to remove a lot of complacent investors in gold," said Phillip Streible, chief market strategist at Blue Line Futures. "A lot of fat has been trimmed and only the lean longs are left. There is not much more room for gold to go down."

The CFTC disaggregated Commitments of Traders report for the week ending July 5 showed money managers lowered their speculative gross long positions in Comex gold futures by 7,378 contracts to 103,472. At the same time, short positions rose by 11,690 contracts to 86,438.

Gold's net length now stands at 17,034 contracts, down more than 52% from the previous week. Gold's net length is at a three-year low. During the survey period, gold prices dropped below critical support levels, eventually testing long-term support at $1,730 an ounce.

Gold prices dropped 3% during the survey period. Analysts note that gold is suffering as the Federal Reserve looks to raise interest rates by another 75 basis points later this month.

The central bank's aggressive monetary policy stance has propelled the U.S. dollar higher. It is pushing breakeven levels – the difference between nominal and real yields, lower. Specifically, the U.S. dollar is trading at a 20-year high, which has been an extraordinary headwind for gold.

While some analysts have said that gold continues to hold up relatively well in the current environment, other analysts are not ruling out further downside.

"We see evidence that the steepest outflows from broad commodity funds since the Covid-19 crisis may be catalyzing a series of cascading liquidations from various speculative groups. This is particularly concerning for gold prices given the extremely bloated length remaining in gold markets from proprietary traders," said analysts at TD Securities. "We have previously cautioned that the substantial size accumulated by this cohort during the pandemic appears complacent in the face of a steadfastly hawkish Fed. In a liquidation vacuum, these positions are now vulnerable, which suggests the yellow metal remains prone to further downside still."

Gold is below its fair value, but silver and copper look better as turnaround plays - Quant Insight

It's not just gold seeing new bearish sentiment emerging in the marketplace. Hedge funds are also increasing their short positioning in silver.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 1,717 contracts to 37,322. At the same time, short positions rose by 7,773 contracts to 46,067.

Silver's positioning is net short 8,745 contracts. This is silver's biggest short positioning since June 2019. During the survey period, silver prices dropped significantly to $19.12 an ounce, its lowest price since July 2020.

Silver has significantly underperformed gold, with the gold/silver ratio pushing above 90 points last week, hitting a two-year high.

Not only is silver suffering as a monetary metal as the Federal Reserve tightens interest rates at a break-neck pace. But the Fed's stance is also increasing fears that the U.S. economy will fall into a recession, which is weighing on silver's industrial demand, which represents about 60% of the market.

The growing recession fears can be seen in the copper market as hedge funds remain fairly bearish. However, the market could be on the cusp of turning around as bulls slowly test the market waters.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures rose by 5,809 contracts to 38,877. At the same time, short positions rose at a slightly faster pace by 6,777 contracts to 65,604.

Positioning in the copper market remains bearish as net short positioning increased to 26,727 contracts.

The base metal continues to struggle in the current environment. During the survey period, copper prices fell to $3.40 an ounce.

Commodity analysts at TD Securities see the potential for copper price to bounce off its recent lows.

"With commodity demand signals breaking down at a pace no longer consistent with the past 90 days, it suggests expectations may have overshot in the immediate term. In turn, this leaves the market poised for a mean-reversion move, although strongly correlated with broad risk assets," the analysts said. "Certainly copper remains one to watch in this scenario."

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.