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Gold market sees second-biggest short covering rally on record as hedge funds caught wrong-footed

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(Kitco News) - Analysts were warning that the gold market was ripe for a short squeeze rally as prices fell to a seven-month low earlier in the month, and they were proven right as the latest trade data from the Commodity Futures Trading Commission (CFTC) showed significant short-covering in gold and silver.

The CFTC's disaggregated Commitments of Traders report for the week ending Oct. 17 showed money managers increased their speculative gross long positions in Comex gold futures by 10,774 contracts to 104,708. At the same time, short positions fell by 31,096 contracts to 89,605.

After two weeks of being net short, speculative positioning has turned sharply bullish and is net long by 15,103 contracts. During the survey period, the short covering propelled gold prices through initial resistance at $1,900 an ounce.

Commodity analysts at Société Générale noted that this was the second-largest short-covering move in the gold market on record, going back to 2006.

"As shown on our Mismatch Indicator, the money manager positioning went from 10 net long traders for a position 27k contracts net short, to 28 net long traders for a position 15k contracts net long," the commodity analysts said. "This situation suggests large overweight, short positions, which may have been trimmed with rising gold prices. This is supported by our Dry Powder Analysis, which shows money manager's short positioning, in notional terms, diverging significantly from the trend line."

Analysts note that while gold is currently benefiting from geopolitical safe-haven demand as Israel wages its war against Hamas, any spark of uncertainty could have ignited this short-squeeze.

"Something I've said a few times in the past year or ten. The Comex #gold COTR is a useful tool to judge short-term vulnerabilities in the gold market," said World Gold Council  chief market strategist John Reade in a social media post. "One thing that has stood out a few times. Net Managed Money, when it gets short, eventually covers. It can take a few weeks, even a few months, but when it does, gold has traded much higher."

Analysts have also noted that this short-squeeze rally could differ from previous episodes as it becomes more sustainable, with prices testing resistance below $2,000 an ounce.

Data shows that along with speculative momentum, long-term investors are starting to jump into the market and buying gold-backed exchange-traded products. SPDR Gold Shares (NYSE: GLD), the world's biggest gold ETF, saw its holding increase by 15 tonnes on Friday as prices spent most of the session above $2,000 an ounce.

Although the gold market is finally seeing some bullish momentum, some analysts also warn that prices are overstretched and could consolidate at these elevated levels.

Gold prices ending the week around $2,000 as geopolitical uncertainty overshadows rising bond yields

Along with gold, the silver market is also enjoying a shift in fortunes as bearish investors were caught wrong-footed.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 1,132 contracts to 31,027. At the same time, short positions fell by 7,141 contracts to 27,701.

After two weeks in bearish territory, the silver market is now net-long by 3,326 contracts. During the survey period, prices pushed above $23 an ounce.

While most of the attention remains on gold as a geopolitical safe haven, many analysts have said that silver is the metal to watch as it traditionally outperforms the yellow metal in a bull market.

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