Is the gold price sustainable at $2,000 as the short-squeeze runs its course?
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(Kitco News) - Gold's push above $2,000 was primarily driven by short covering, according to the latest data from the Commodity Futures Trading Commission. However, growing safe-haven interest as the world faces the biggest banking crisis since 2008 could create sustainable bullish momentum, according to some analysts.
The latest and up-to-date trade data from the CFTC comes nearly a month after reporting was disrupted because of a ransomware attack on ION Trading UK. According to reports, about 20% of CME Group clearing members were affected by the cyberattack.
With the trade data back on track, commodity analysts note the growing potential for a sustained rally in gold as speculative bullish interest remains well below historical levels.
"Compared with the last time gold traded at $2000 last year in March, the 107k lots net-long is 40% below the length held back then, highlighting the prospect for more buying should the technical and fundamental outlook continue to support," said Ole Hansen, head of commodity strategy at Saxo Bank.
However, Hansen also noted that investors might be reluctant to chase the market as prices test resistance at $2,000 an ounce, which has proven to be a formidable barrier.
The CFTC's disaggregated Commitments of Traders report for the week ending March 21 showed money managers increased their speculative gross long positions in Comex gold futures by 6,530 contracts to 124,090. At the same time, short positions dropped by 14,978 contracts to 43,861.
The gold market is now net long by 81,229 contracts, up 36% from the previous week and its highest level in roughly a month.
John Reade, chief market strategist at the World Gold Council, said in a comment on Twitter that gold's short-squeeze has probably run its course.
"Gross short #gold futures positions are now around the lowest levels seen in the past two years, while long positions are less extended," he said. "So, although there is room to add on the long side, there's probably limited room for further short covering from Money Managers."
Gross short #gold futures positions are now around the lowest levels seen in the past two years, while long positions are less extended.— John Reade (@JReade_WGC) March 27, 2023
So, although there is room to add on the long side, there's probably limited room for further short covering from Money Managers.
Commodity analysts at TD Securities said that while gold has made some solid gains in the last couple of weeks, the trend will depend on the Federal Reserve's monetary policies.
"In order for the yellow metal to keep these sustained new highs, money managers will need to see the Fed show willingness to cut rates even if inflation remains far off the two percent target," the analysts said.
Last week, gold managed to retest resistance around $2,000 an ounce after Federal Reserve Chair Jerome Powell signaled that its aggressive tightening cycle could be close to ending. After raising interest rates by 25 basis points, Powell said that the banking crisis has tightened lending conditions, effectively doing the central bank's job for it.
"We no longer state that ongoing rate increases will be needed to quell inflation. Instead, we now anticipate that some additional policy firming may be appropriate," Powell told reporters Wednesday.
Although the Federal Reserve could be close to ending its aggressive tightening, Powell added that he doesn't expect the central bank to cut rates this year.
|Banking uncertainty spurs gold gains, will trade around $2,000 through 2023 - State Street's George Milling Stanley|
Analysts note that Powell's outlook is at odds with market expectations that are looking for a rate cut in June and four rate cuts through year-end.
Analysts have said that it is unlikely the central bank will continue to raise interest rates as the world deals with the early stages of a banking crisis.
At the same time, the silver market also continues to benefit from a short-squeeze. However, the latest data shows that investors are still reluctant to make any significant bullish bets as the world faces growing recessionary threats.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 363 contracts to 30,589. At the same time, short positions fell by 4,785 contracts to 30,866.
Positioning in the silver market remains net bearish by 277 contracts. During the survey period, silver pushed to a one-month high of $22.785 an ounce. Although prices have moved above $23 an ounce since then, the market is running into new resistance levels below $24 an ounce.
Analysts have said weaker industrial demand for silver through 2023 could hold prices back. Those concerns are also reflected in copper, even as prices hold around $4 per pound.
The COT report showed that money-managed speculative gross long positions in Comex copper futures fell by 4,617 contracts to 36,310. At the same time, short positions fell by 6,396 contracts to 43,743.
Copper positioning remains net short by 7,433 contracts, the most significant bearish positioning since mid-October. Analysts have said that an improving global supply chain for industrial metal and an uneven economic recovery in China weigh on prices.
"Weak car and home sales in China are pointing to sluggish demand from the Middle Kingdom, whereas supply risks have also eased along with Peruvian unrest, while disruptions in Panama, Chile and Indonesia also simultaneously resolved. While this pulled the rug from under copper prices in the near-term, the outlook in China is likely to strengthen into summer. In turn, conviction in copper prices may remain elusive," said analysts at TD Securities.