Gold sees Fed-induced contraction, can it last

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(Kitco News) – Sentiment is changing rapidly for gold and silver as hedge funds continue to increase their bearish bets ahead of the Federal Reserve’s monetary policy decision last week, according to data from the Commodity Futures Trading Commission.

While the latest Commitment of Traders reports show a slight increase in bearish sentiment for gold and silver, some analysts note that the data is backward looking as prices have rallied, trading at a three-week high.

Analysts note that gold is enjoying a relief rally as investors and traders expected the Federal Reserve to be much more hawkish last week. Analysts said that while the US central bank is maintaining its aggressive tightening stance, there has been a slight shift in its stance.

Federal Reserve Chairman Jerome Powell said the central bank would be appropriate to slow the pace of rate hikes as the economy begins to react to its aggressive monetary policy.

“After the massive sell-offs seen recently, and with Fedspeak seeing the market pull away from a 100 basis point price rally, long positioning in the yellow metal quickly rebounded after prices broke through the $1700 level. Additionally, with the Fed raising rates by 75 basis points, and Chairman Powell noting that the Fed may slow the pace of its hike in future meetings, gold bugs have been given additional breathing space as the resulting short hedging saw prices rally at the end of the week,” TD Securities commodity analysts said.

The CFTC’s disaggregated report on traders’ commitments for the week ending July 19 showed fund managers increased their speculative gross long positions in Comex gold futures from 1,160 contracts to 92. 216. At the same time, short positions grew at a faster rate, from 1,515 contracts to 111,309.

The net short position in gold increased by 19,093 contracts. During the survey period, gold prices briefly fell below $1,700, reaching their lowest level in a year. The gold market has seen its bearish positioning increase over the past five weeks. However, analysts noted that gold looked overbought and ripe for a short squeeze.

TD Securities said that although prices have room to rise, they took a tactical short position in gold as the market appears overbought after the Fed’s rally.

“We are entering a tactical short position in gold, anticipating that a reassessment of Fed expectations will exacerbate ongoing exits in the yellow metal, driving prices lower,” the analysts said.

In a recent interview with Kitco News, Phillip Streible, chief market strategist at Blue Line Futures, said he would consider taking profits as gold prices move closer to $1,800 an ounce.

Streible added that markets might be a little too early to anticipate a pivot from the US central bank. He noted that the latest inflation data shows that consumer prices remain high, which could force the Fed to maintain its aggressive stance for longer than expected.

With gold, hedge funds remain aggressively bearish on silver. The disaggregated report showed silver-managed speculative gross long positions in Comex silver futures increased by 310 contracts to 36,721. Meanwhile, short positions increased by 4,087 contracts at 54,539.

Silver positioning is net short 17,818, up 26% from the prior week. During the survey period, silver prices held support at $18 per ounce.

Similar to gold, silver has seen a strong rebound after last week’s interest rate hike. Although the gold/silver ratio has fallen from its two-year high, it remains high at around 87 points.

Although silver prices are currently trading solidly above $20 an ounce, some analysts fear the rally may not be sustainable as the threat of a recession grows.

A recession would lead to less industrial use of silver, which represents more than 50% of the demand for the precious metal.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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