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Gold's fear trade has officially peaked as hedge funds ditch their bullish bets

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(Kitco News) - Although inflation pressures are easing and a weakening economy is starting to cool down the labor market, analysts have said that the Federal Reserve still isn't ready to shift its tightening bias, which is keeping hedge funds out of the gold market.

The latest trade data from the Commodity Futures Trading Commission (CFTC) shows the fear trade that drove gold prices to $2,000 an ounce last month has run its course and according to some analysts, the market needs a new catalyst.

The CFTC's disaggregated Commitments of Traders report for the week ending Nov. 14 showed money managers dropped their speculative gross long positions in Comex gold futures by 7,685 contracts to 132,924. At the same time, short positions rose by 6,235 contracts to 68,609.

Gold's net length fell to 64,315 contracts. This was the gold market's first decline since mid-October. Last month, the gold market saw near-record speculative bullish interest as a war between Israel and Hamas created new uncertainty and chaos in the Middle East.

However, the conflict has remained confined within Gaza, and investors are again focused on economic conditions as geopolitical uncertainty stabilizes.

Although gold's bullish speculative momentum has peaked, with prices holding support around $1,940 an ounce during the survey period, many analysts remain optimistic that prices will continue to consolidate at current levels.

“It's possible that the current decline will result in a useful consolidation. If so, then the bulls should soon find their feet, together with enough upside momentum to drive prices back above $2,000 once again,” said David Morrison, senior market analyst at Trade Nation, in a note.

In a recent interview with Kitco News, Michele Schneider, director of trading education and research at MarketGauge, said that there is enough economic uncertainty to keep gold supported at elevated levels. She explained that she sees gold biding its time, waiting for the Federal Reserve to make a policy mistake.

Schneider said that the biggest threat to U.S. monetary policy remains the government's massive debt.

“There is nobody who wants to buy U.S. debt and the Federal Reserve is going to be forced to buy the debt,” she said. “This new [quantitative easing] is what pushes gold to all-time highs. The gold market is just waiting for the Federal Reserve to make a misstep in monetary policy.”

However, Schneider also said that she is not expecting gold prices to break above $2,000 until maybe 2024 or 2025.

Along with gold, the silver market is also struggling to maintain its bullish momentum as prices have been unable to hold above $24 an ounce.

The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 5,070 contracts to 30,527. At the same time, short positions rose by 1,285 contracts to 23,822.

The silver market is now net long 6,705 contracts as prices pushed above $23 an ounce during the survey period. Although gold prices rallied above $24 an ounce last week, the precious metal has been unable to maintain that momentum.

Analysts have said that silver continues to benefit from solid industrial demand. In a report published last week, analysts at Metals Focus said silver industrial demand is expected to grow 8% to a record 632 million ounces this year.

While gold and silver remain within a broad trading range with little momentum, some market analysts are paying a little more attention to platinum group metals as platinum and palladium appear oversold.

The disaggregated report showed that money-managed speculative gross long positions in platinum futures fell by 281 contracts to 28,138. At the same time, short positions rose by 15,115 contracts to 45,391.

Analysts at Société Générale noted that the platinum market saw outflows of $708 million.

“After stagnating in May, money managers' short positions have been on a rising trend since the end of June, with the latest flow discussed above bringing the total to a level unseen since September 2018. This bearish flow also pushed platinum into oversold territory,” the analysts said.

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