With so many gold and silver bears, it doesn't take much to trigger a short squeeze
The U.S. dollar's unrelenting rally at a 20-year high continues to force hedge funds to increase their bearish bets in gold, according to the latest data from the Commodity Futures Trading Commission.
Although there are risks that the U.S. dollar could push precious metal prices lower, analysts note that Monday's 2% rally in the gold market is an indication that the market is susceptible to a short-covering squeeze.
The silver market is seeing an even more substantial short squeeze as prices last traded at $20.71 an ounce, up nearly 9% on the day. Silver is seeing its best daily percentage gain since mid-August 2020.
Gold prices last traded at $1,704 an ounce, their highest level since Sept. 15. According to analysts, bearish gold investors are covering their short bets as rising global economic uncertainty and a potential international banking crisis are driving renewed interest for safe-haven assets.
"There are so many shorts that it just takes a small catalyst to ignite a much bigger rally," said Netish Shah, head of commodity research at WisdomTree.
Many analysts have been warning of the extreme short position building in the gold market as hedge funds increase their bearish bets for the seventh consecutive month.
The CFTC disaggregated Commitments of Traders report for the week ending Sept. 27 showed money managers dropped their speculative gross long positions in Comex gold futures by 4,373 contracts to 74,171. At the same time, short positions rose by 2,026 contracts to 117,265.
Gold's net short positioning now stands at 43,094 contracts, up nearly 17% from the previous week. Positioning is at its lowest point since November 2018.
"At this stage, the main buyer is likely to be money managers reducing short bets on COMEX gold," said Ole Hansen, head of commodity strategy at Saxo Bank.
Along with rising financial market uncertainty, Shah said that strong physical demand for gold should also support prices and put further pressure on short positioning. He explained that the disconnect between robust physical demand and weak paper investment is not sustainable.
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Although some analysts see the extreme positioning as a buying opportunity, other analysts note that the market is still in a technical downtrend. Bearish analysts have said that these gold rallies could prove to be short-lived as the Federal Reserve's aggressive monetary policy stance drives the U.S. dollar and bond yields continue to move higher.
Commodity analysts at TD Securities said they still expect gold prices to push lower. They noted that gold still hasn't seen a significant capitulation moment.
"While rates markets continue to reflect a more aggressive Fed rate hiking path, gold markets are still not pricing in the next stage of the hiking cycle. Amid persistent inflation, a restrictive rates regime may last longer than historical precedents, pointing to a prolonged period of pronounced weakness in precious metals," the analysts said in a note.
While hedge funds remain significantly bearish on gold, they are reducing their overall exposure in silver.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 2,165 contracts to 34,429. However, short positions also rose by 2,093 contracts to 42,522.
Silver's positioning is now net short by 8,093 contracts, relatively unchanged from the previous week.
Although silver's bearish positioning has bounced off its recent three-year lows, analysts note that sentiment is still significantly depressed and ripe for a short squeeze.
"When positioning becomes too stretched on the short side, we usually observe a wave of short-covering, which was the case at the end of 2018 and early 2019 said Edward Meir, commodity consultant at ED&F Man Capital Markets.
By Neils Christensen
For Kitco News
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