Hedge funds have been caught with their bearish bets on gold

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(Kitco News) – Market expectations that the Federal Reserve will act aggressively to stem the growing threat of inflation are prompting some hedge funds to increase their bearish bets on gold after reviewing the latest data from the Commodity Futures Trading Commission, analysts said.

The CFTC’s disaggregated Commitments of Traders report for the week ended January 18 showed money managers increased their speculative gross long positions in Comex gold futures by just 510 contracts to 119,807. At the same time, short positions increased by 3,027 contracts to 48,014.

Gold’s net length now stands at 71,793 contracts, relatively flat over the survey period. Despite the increase in short bets, gold prices have been relatively stable, holding well above $1,800 an ounce.

Commodity analysts at TD Securities noted that the surge in short positions over the past week came as yields on 10-year interest rates began to rise, with chatter in the markets suggesting the Federal Reserve may begin to to reduce its bloated balance sheet before the end of the year and possibly raise interest rates by 50 basis points in March.

However, TDS also noted that bearish gold investors appear to have been taken by surprise as prices have risen sharply to around $1,840 an ounce despite the rise in bond yields.

“Most investors mistakenly believed that previous price gains would be eroded ahead of the FOMC. By the looks of it, prices surged above $1,840/oz as many market participants didn’t believe real interest rates would rise enough to trigger big selling given the recent sharp rise in energy prices,” analysts at TDS said. ” We expect gold to hold near the current level of $1,830/oz through next week, with positioning likely to move toward the long.”

Ole Hansen, Saxo Bank’s head of commodity strategy, also noted that gold is getting a bid as markets appear to be misreading US monetary policy.

“The latest move came in response to the market, which we believe is wrongly pricing in lower inflation expectations in the belief that a series of rate hikes signaled by the US Federal Reserve will be enough to contain inflation,” he said he.

There was also a divergence in the gold market last week. Although money managers were short futures contracts, the precious metal also renewed demand for gold-backed exchange-traded funds. On Friday, the world’s largest gold EFT, SPDR Gold Shares (NYSE:GLD), recorded inflows of 27.6 tons with a market value of more than $1.6 billion.

This was the largest dollar inflow since its listing in 2004.

“Increasing tensions over Ukraine could explain the purchase of the ETF shares as they appear to be generating demand for safe-haven gold. Also, equity markets have been under pressure in recent days, which has made gold more attractive,” said Daniel Briesmann, precious metals analyst at Commerzbank, in a report on Monday.

As gold struggles to attract fresh bullish attention, the silver market appears to be taking off. Some analysts have said that silver’s rally is being driven in part by new bullish momentum in base metals.

The disaggregated report showed that money-managed gross speculative long positions in Comex silver futures increased by 2,827 contracts to 53,143. At the same time, short positions decreased by 3,087 contracts to 29,427.

Silver’s net length stands at 23,716 contracts, up more than 33% from the previous week.

Silver prices managed to surge above $23.50 an ounce during the survey period. Since then, the silver market has seen significant momentum, climbing to a two-month high above $24.50 an ounce. The price appears to be finding new support just above $24 an ounce.
The copper market also saw increased bullish interest last week.

Copper’s disaggregated report showed that money-managed gross speculative long positions in high-grade Comex copper futures increased by 2,706 contracts to 61,814. At the same time, short positions decreased by 2,940 contracts to 34,024

Copper’s net length currently stands at 27,790 contracts, up more than 25% from the previous week. During the survey period, copper prices held support just below $4.40 a pound.

“We maintain a bullish outlook for copper, driven by the prospect of rising electrification demand, tight supplies and signs that China is stepping up its policy response to support a slowing economy, thereby offsetting recent macro risks, notably those emanating from China’s beleaguered real estate sector,” Hansen said.

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