Hedge funds continue to bet on gold, prices have room to move higher

Mon July 27 2020

Hedge funds continued to increase their bullish bets on gold, embarking on what would eventually be a push to record all-time highs, according to the latest data from the Commodity Futures Trading Commission (CFTC).

The CFTC's disaggregated Commitments of Traders report for the week ending July 21 showed money managers increased their speculative gross long positions in Comex gold futures by 3,856 contracts to 181,256. At the same time, short bets fell by 1,440 contracts to 40,987.

Gold’s net length now stands at 140,269, up roughly 4% from the previous week. During the survey week gold prices managed to hold critical support above $1,800 an ounce and pushed to initial resistance just below $1,850 an ounce.

“The increase in gold long positions was also driven by the long awaited slide in the USD, and counter to recent behavior, strong risk appetite,” said analysts at TD Securities. “The somewhat unexpected rise in inflation expectation, at the same time as longer-term nominal yields eased, likely prompted shorts to cover. The short-covering was also no doubt propelled by the positive momentum and may be exacerbated by the break out into $1,900.”

Since the end of last week’s report, the gold market has continued on its near-parabolic rally with prices surpassing the 2011 all-time highs.

Although the gold market has some serious bullish momentum, many investors are wondering if the market is getting a little too crowded.

Ipek Ozkardeskaya, market analyst at Swissquote Bank, said that along with speculative interest, momentum indictors show the market is overbought. However, she also added that the precious metal could have room to move to $2,000 before there is any significant profit taking.

“Low US yields remain supportive of a further attempt on the $2000 mark, even though the RSI index near 85% warns that the precious metal has been bought too fast in a too short period of time and a downside correction should be healthy at the current levels. There is a mounting risk of rapid profit taking and a sharp downside correction, provided the decent amount of long speculative positions in gold,” she said.

However, other analysts note that although prices have rallied significantly this past month, speculative interest in gold is well below historical levels. Gold’s net length only started to tick higher after a three-month downtrend.

“Looking at open interest in the futures markets, there does not seem to be excessive speculative positioning. This suggests physical buying and exchange traded funds are currently the key factors driving the price, which means a break above $2,000 will likely lead to increased speculative positioning that could push prices even higher,” said Hussein Sayed, chief market strategist at FXTM in a report Monday.

Analysts at Commerzbank also said that gold has plenty of upside when looking at speculative interest.

“The fact that the rise in the gold price has been hardly driven by speculation at all argues against any excessive correction,” the analysts said in a report Monday. “Net long positions held by speculative financial investors increased only slightly in the last reporting week, and still remain significantly short of their early-March level.”

Although bullish bets in gold haven’t reached their pre-COVID-19 levels, the silver market nearly achieved that goal last week.

The disaggregated report showed money-managed speculative gross long positions in Comex silver futures rose by 5,881 contracts to 71,496. At the same time, short positions fell by 3 148 contracts to 22,840.

Silver’s net lengthy jumped to 48,656 contracts, up more than 14% from the previous week. The renewed investor interest pushed silver prices its highest level in seven years with prices moving above $21 an ounce.

Commerzbank said that while gold’s speculative interest is still low, it is rapidly increasing in silver and that market is looking a little crowded.

Ole Hansen, head of commodity strategy at Saxo Bank, noted that silver’s net positioning is only about 30% from its February peak.

Source: https://www.kitco.com/