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Hedge funds caught on the wrong foot as gold, silver short squeezes fizzle

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(Kitco News) - Volatility surrounding the Federal Reserve’s monetary policy continues to dominate the precious metals market as hedge funds were caught on the wrong foot and were unable to squeeze gold and silver prices through critical resistance levels.

The gold market rallied to a three-week high last week as the latest trade data from the Commodity Futures Trading Commission shows a solid increase in long positioning and a sharp reduction in bearish bets.

Some analysts noted that disappointing economic data and signs that the labor market is starting to cool attracted some buyers, all while gold was starting to see oversold price levels and conditions for a short squeeze were building.

The CFTC's disaggregated Commitments of Traders report for the week ending Aug. 29 showed money managers increased their speculative gross long positions in Comex gold futures by 15,524 contracts to 120,609. At the same time, short positions fell by 14,609 contracts to 81,367.

The gold market is now net long by 39,242 contracts. During the survey period, December gold futures hit a high of $1,966.50 an ounce. Bullish momentum pushed gold prices to $1,980 but wasn’t enough to break that long-term resistance level.

Commodity analysts at Société Générale said the precious metals sector was the most active last week, seeing $8.2 billion in bullish inflows; at the same time, gold led the sector with $5.2 billion in inflows.

Carsten Fritsch, precious metals analyst at Commerzbank, said in a research note that bullish positioning in the gold market increased fourfold from the previous week.

However, he added that investors should not expect to see a sustained rally in gold in the near-term  as U.S. economic data has not weakened decisively enough for the Federal Reserve to halt its monetary policy tightening.

"It is still too early to proclaim this as the start of a trend reversal," said Fritsch in the note. "This was also clear from the way the gold price responded to the US labour market data on Friday: [spot gold prices] climbed briefly to $1,950 per troy ounce because the report indicated a further easing of the labour market situation. However, the uptick was reversed again shortly afterwards because there was no reassessment of the Fed interest rate expectations. This is unlikely to change until the Fed’s meeting in two weeks’ time, meaning that [spot gold] will probably remain capped for now at $1,950."

Although the gold market is struggling to find its footing as stubborn inflation is putting pressure on the Federal Reserve to maintain its tightening stance, some analysts still see potential for gold as bearish positioning remains elevated.

"Shorts still very high(81.4K) & the net long futures contracts very low at 39K," said Fred Hickey, creator of The High-Tech Strategist investment newsletter, in a social media post. "Heavy upward buying pressure remains."

The silver market saw an even bigger short squeeze as net positioning was even more extreme than gold. However, like gold, silver couldn’t hold its gains as prices dropped below $25 an ounce.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 6,980 contracts to 43,477. At the same time, short positions fell by 8,116 contracts to 26,998.

Gold is stuck in neutral and remains at the mercy of the US dollar and bond yields next week

The silver market is now net-long by 16,479 contracts. The precious metal saw its biggest reversal since mid-July as the short-squeeze pushed prices to a five-week high above $25 an ounce.

Silver prices are starting the new trading week testing support just above $24 an ounce. Commodity analysts at TD Securities said a break below $23.60 an ounce could trigger a new wave of selling pressure.

Although silver is struggling to attract consistent bullish momentum, many analysts said that its long-term potential remains intact as the growing solar power sector is expected to drive industrial demand for the precious metal.

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.