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(Kitco News) - As expected, hedge funds have significantly pared back their short bets in gold, but are reluctant to take any major bullish position, according to the latest data from the Commodity Futures Trading Commission.
Last week, gold prices saw an impressive short-covering rally that drove prices to a one-month high; however, the market has been unable to consistently hold gains above $1,700 an ounce. Analysts have said speculative bearish positioning at multi-year highs will keep gold volatile and susceptible to short squeezes. But gold will struggle to maintain any bullish momentum as the Federal Reserve continues to aggressively raise interest rates.
December gold futures last traded at $1,689.40 an ounce, up 0.84% on the day.
"Inflation's rising persistence suggests the Fed is unlikely to stop hiking preemptively, which suggested the short squeeze would ultimately fail as technical resistance held while rates and the broad dollar resumed their rally. A prolonged period of restrictive rates suggests traders should ignore gold's siren calls, as a sustained downtrend will likely prevail, while quantitative tightening continues to drive real rates higher," said commodity analysts at TD Securities. The Canadian bank has been tactically bearish on gold through most of the summer.
According to the CME FedWatch Tool, markets see an 85% chance that the Federal Reserve will raise the Fed Funds rate by another 75 basis points in November. Commodity analysts at Commerzbank said that real interest rates are on track to rise to 1.7%, its highest level since August 2009.
"This makes gold less attractive as a non-interest-bearing investment. For as long as the headwind generated by the U.S. dollar and climbing (real) yields persists, gold is likely to remain on the defensive," the analysts said.
The CFTC disaggregated Commitments of Traders report for the week ending Oct. 4 showed money managers increased their speculative gross long positions in Comex gold futures by 8,635 contracts to 82,806. At the same time, short positions fell by 27,584 contracts to 89,681.
Gold's net short positioning now stands at -6,875 contracts, down 84% from the previous week. Gold's bearish positioning is at its lowest point since early August.
During the survey period, gold pushed to a high of $1,738.70 an ounce, rallying 7% from the multi-year low the previous week.
Commodity analysts at Socit Gnrale said that $4.7 billion in funds flowed into the gold market last week, the third largest move since the CFTC started its updated survey in 2006.
While gold could continue to struggle because of solid bullish momentum in the U.S. dollar and rising bond yields, Nicky Shiels, head of metals strategy at MKS PAMP, said there appears to be some underlying strength in the marketplace. Based on the data, gold's move was overextended by about $50, she added.
"Gold did more than it should've given known flows indicating there has been some additional unknown buying (physical, OTC investor longs, option-related and/or official sector), and lack of sellers," Shiels said. "Gold is usually attractive when positioning is super clean as it is, but that's assuming ETFs are idle HODLs (to borrow a crypto term). Unless a gold-specific catalyst emerges, COT shorts are clean & can reengage while ETFs can continue bleeding out into higher real interest rates & US$."
Along with gold, hedge funds covered their short bets at a significant pace.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures rose by 3,456 contracts to 37,885. At the same time, short positions fell by 10,274 contracts to 32,248.
Silver's net length stands at 5,637 contracts. This is the second week silver has seen an increase in bullish bets, with the market turning net positive for the first time since late July.
During the survey period, silver prices rallied from $18 an ounce to above $21 for a gain of more than 16%.
However, silver's short-covering rally has also proven to be short-lived, with prices falling back below $20 an ounce. December silver futures last traded at $19.57 an ounce, down 0.23% on the day.
Some analysts have said that silver prices could once again underperform gold as recession fears grow, weighing the precious metal's industrial demand.