(Kitco News) - Hedge funds are starting to recognize the value of holding some gold and silver as money managers increase their bullish bets, according to the latest trade data from the Commodity Futures Trading Commission.
The CFTC's disaggregated Commitments of Traders report for the week ending August 20 showed that money managers decreased their speculative gross long positions in Comex gold futures by 18,298 contracts to 222,142. At the same time, short positions rose by 2,908 contracts to 28,837.
Gold’s net length now stands at 193,305 contracts. The bullish speculative position has risen to its highest level since early March 2020 when the Federal Reserve, in an emergency meeting, cut interest rates by 50 basis points as the global economy was experiencing the early effects of the COVID-19 pandemic.
Even with gold prices at record highs and silver trading at a six-week high, analysts note that the precious metals market does not look overbought, with little speculative froth in the marketplace. December gold futures last traded at $2,350 an ounce, up 0.15% on the day.
Although speculative positioning has reached a four-year high, some analysts note that it has been a fairly slow boil. Speculative activity has been relatively stable since March. In a recent interview with Kitco News, Joy Yang, Global Head of Index Product Management at MarketVector Indexes, said that gold has been building a solid base as it launches to consecutive record highs.
Nicky Shiels, Head of Research & Metals Strategy at MKS PAMP, said that the inflows seen in the last week are about a quarter of the size of inflows seen before the 2019 rate-cutting cycle. However, she noted that positioning was already above the previous cycle.
Shiels said that even with elevated speculative positioning, gold still has room to move higher.
“By no means are ALL investors firing on all cylinders, and the now confirmed ‘Powell Pivot’ with any incremental US$ weakness should see inflows accelerate into elections,” she said in a note Friday.
Throughout most of the year, investor demand has played a minimal role in the gold market as prices have been driven by record central bank purchases and Asian retail demand. However, analysts expect that investors will start to take a bigger interest in gold as the Federal Reserve looks to begin its easing cycle next month.
“With CTA trend followers tapped out, these flows largely reflect discretionary money managers, emboldened by an imminent cutting cycle, geopolitics, deficits, lower rates, and a slumping dollar, growing their net length towards extreme levels,” said commodity analysts at TD Securities in a note Friday.
In an interview with Kitco News, Eric Stand said that the gold market has not seen its full potential just yet.
However, while gold remains in a long-term uptrend, Stand also warned investors that the elevated speculative positioning could create some near-term volatility in the marketplace.
Analysts have said that any weakness in equity markets could trigger a liquidity event, which would weigh on gold.
While investors continue to focus on gold, there is growing attention on silver as prices hold above $29 an ounce.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 3,712 contracts to 39,517. At the same time, short positions fell by 2,793 contracts to 9,678.
Silver’s net length currently stands at 29,839 contracts, a one-month high. During the survey period, silver prices pushed back above $30 an ounce.
As investors prepare for a rate cut next month, silver has managed to outperform gold. The gold/silver ratio is currently trading around 84 points, down from 90 points seen at the start of the month.
Analysts note that gold and silver continue to benefit from a weaker U.S. dollar, which has dropped more than 4% since the start of the month.
