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(Kitco News) - Expectations that July will be the Federal Reserve's last rate hike in its most aggressive tightening cycle have emboldened hedge funds to jump back into the gold market, even as some are starting to second-guess the newfound optimism.
The CFTC's disaggregated Commitments of Traders report for the week ending July 18 showed money managers increased their speculative gross long positions in Comex gold futures by 23,250 contracts to 147,644. At the same time, short positions fell by 9,625 contracts to 32,326.
The gold market is now net long by 115,318 contracts, and bullish speculative positioning has pushed it to its highest level since early March 2022. During the survey period, gold prices rallied to a seven-week high, testing resistance around $1,980 an ounce.
The rally came after weaker-than-expected June consumer inflation data. In reaction to the inflation numbers, some market participants suggested that the Federal Reserve now has room to end its aggressive tightening cycle.
However, gold has been unable to hold last week's gains as it now tests support above $1,950 an ounce. Stubborn core inflation and a robust labor market supporting higher wages could force the U.S. central bank to maintain its aggressive stance longer than expected.
"With headline inflation dropping to 3%, many investors believed that the US central bank was less likely to match its hawkish rhetoric with actual interest rate increases. But with prices falling from the CPI-inspired highs following firmer-than-expected jobless claims data, and rates and the USD again trending higher, it is likely that positioning will tilt to the short end as we approach Fed decision day,” said analysts at TD Securities in a research note published Friday.
"With core CPI still running at a high 4.8 percent and employment staying firm, US monetary officials will continue to talk hawkish after they deliver another 25 bps hike on Wednesday. This is unlikely to be a positive for gold and we should see it trade near key support levels,” they wrote.
In a recent interview with Kitco News, Sean Lusk, co-director of commercial hedging at Walsh Trading, said that while he looks to buy gold on any dip, it doesn't pay to try to get in front of the Federal Reserve.
Economists and analysts have said that gold will regain its luster only when the Federal Reserve has made it clear it is done raising interest rates. However, some economists have said that even if July is not the last rate hike, the central bank is entering its end game, and they are closing in on terminal rates, which is why some hedge funds are starting to test the gold investment water again.
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In a recent interview with Kitco News, Steven Land, lead portfolio manager of Franklin Templeton's Franklin Gold and Precious Metals Fund, said that gold's lackluster positioning shows its potential in the market.
While bullish sentiment has pushed to nearly a 1.5-year high, he noted that speculative positioning is still below levels seen when gold prices hit record highs in 2020.
He added that investor demand will pick up as economic activity, choked by the Federal Reserve's interest rates hikes, starts to weaken.
"We haven't really seen investment demand in the market, but once this picks up, prices could easily get back to record highs,” he said.
As bullish as investors were on gold last week, the yellow metal can't hold a candle to silver.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 22,259 contracts to 53,781. At the same time, short positions fell by 1,932 contracts to 24,092.
After trending in neutral territory for a month, silver's net length jumped to 29,689 contracts, its highest level since mid-April, while bullish sentiment rose at its fastest pace in more than five years.
Leading up to last week's survey, silver prices rose nearly 8%. During the survey period, silver prices continued upward, hitting a nine-week high of $25.475. However, the market has seen some significant profit-taking, pushing prices to support around $24.50 an ounce.
Some analysts have noted that silver has outperformed gold as U.S. economic activity has remained more resilient than expected. However, other analysts question if this pace will last if the U.S. slips into a recession.
Despite some short-term volatility, most analysts remain extremely bullish on silver in the long term as the green energy transition and robust demand for solar power continues to drive industrial demand for the precious metal.
