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Gold, silver and copper are ripe for short covering - analysts

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(Kitco News) - Hedge funds continue to add to their bearish bets on gold. Still, analysts say that the downside could be limited and the market is becoming an attractive contrarian move.

The CFTC disaggregated Commitments of Traders report for the week ending July 19 showed money managers lowered their speculative gross long positions in Comex gold futures by 613 contracts to 91,056. At the same time, short positions rose by 11,992 contracts to 109,794.

Gold's net short positioning increased to 18,738 contracts. During the survey period, gold prices tested support at around $1,700 an ounce. Bearish positioning is at its highest level since May 2019.

Analysts have noted that the gold market has been in a solid downtrend as the Federal Reserve has aggressively raised interest rates to slow down the economy and cool rising inflation pressures. The central bank is looking to raise interest rates by another 75 basis points Wednesday. Markets see interest rates potentially rising to between 3.50 and 3.75% by the end of the year.

However, many analysts have also said that these rate hikes have been priced into the market, limiting gold's downside through the rest of the year. Some analysts have also noted that a slowing economy and potential recession could cause the Fed to slow the pace of rate hikes.

"Any sign that the Federal Reserve is relenting on rate hikes will be good for gold," said John Hathaway, senior portfolio manager of Sprott Hathaway Special Situations Strategy. "I look at these numbers as a signal about sentiment and people being despondent, discouraged. It's from these low points in terms of psychology that you get these dramatic rallies."

Commodity analysts at Société Générale said that the gold market has seen $21 billion in bearish positioning since June 21. They also noted that the market is "extremely vulnerable" to short covering.

Analysts note that the last time gold's net positioning was this bearish, the market quickly turned around and went on a months-long rally that pushed prices to record highs above $2,000 an ounce.

Will gold survive another 75 basis point hike

"[Sentiment] doesn't guarantee anything, but with this kind of historical benchmark, gold sure isn't at a top. Even for an agnostic trader, you would want to pay attention to this stuff," said Hathaway.

But it's not just gold. Analysts at SocGen also see silver as "extremely vulnerable" to short covering.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 684 contracts to 36,411. At the same time, short positions rose by 2,909 contracts to 50,452.

Silver's positioning is net short by 14,041. Silver prices held support at $18 an ounce during the survey period.

The silver market continues to struggle as industrial demand remains muted. Analysts note that 60% of silver demand comes from industrial uses.

However, some analysts note that sentiment in industrial metals, as seen in the copper market, could be close to a bottom.

Copper's disaggregated report showed money-managed speculative gross long positions in Comex high-grade copper futures fell by 1,099 contracts to 38,869. At the same time, short positions fell by 4,904 contracts to 53,405.

This is the second consecutive increase in bullish positioning as net short bets totaled 14,536 contracts. During the survey period, copper prices bounced off support below $3.20 per pound.

"The (local) peak in commodity outflows is behind us. Capital is flowing back into broad commodity funds, for the first time in more than a month. This marks the end of the steepest outflows from this cohort since 2014, after a month of carnage in the commodity sector saw outflows outpace those observed during the covid-19 panic," said commodity analysts at TD Securities. "Ultimately, base metals are still in a bear market regime, but the set-up is still ripe for a short covering rally to ensue."

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