(Kitco News) – The gold market has made some significant moves over the past two weeks, as prices have rallied to a three-month high and within a staggering $1,800 an ounce.
Though the precious metal is in a solid uptrend, some analysts say gains may be more fragile than it appears as the initial push was driven mostly by short covering, according to the latest data from the Commodity Futures Trading Commission (CFTC).
The CFTC’s unbundled traders’ pledges were released on Monday as government offices closed on Friday, Nov. 11, in recognition of Memorial Day. Although investors began placing more bullish bets on gold, sentiment was still overly bearish.
The latest COT report for the week ending Nov. 8 showed fund managers increased their speculative gross long positions in Comex gold futures by 9,846 contracts to 88,059. At the same time, short positions decreased by 15,209 contracts to 104,405.
Net short positioning in Gold now stands at 16,346 contracts, up nearly 51% from the previous week. While the latest report shows sentiment is still bearish, it has moved significantly from its recent four-year highs.
During the survey period, gold prices rebounded from a two-year low at $1,618 and pushed past $1,700. Analysts note that the latest trade data is looking back as sentiment has swung to the bullish side as prices moved above $1,750 and many see $1,800 as a new short-term target.
“The rally started off as a short squeeze, but we expect bullish investors to have the upper hand for now,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Commodities analysts at Commerzbank also said they suspect sentiment has swung to the bullish side as prices rose more than 4% from last Tuesday.
Hansen added that the change in momentum can also be seen in the price action, as gold has seen only superficial pullbacks since the start of the rally.
“The sentiment has clearly changed as there is now a buy-the-dip mentality in the market. Gold investors who are short are using the dips to hedge their positions,” he said.
Hansen also noted that sentiment in the futures market has changed, but investors are generally reluctant to switch to gold as demand for exchange-traded funds redeemable in gold remains sluggish. He added that gold bulls need to keep a close eye on this sector.
During the COT survey period, SPDR Gold Shares (NYSE:GLD), the world’s largest gold ETF, recorded outflows of 3.21 tonnes. Over the past four days, inflows have only increased by just over 2 tons.
“Sentiment is changing, but now we need to see long-term investors in the ETF market come in to support the market,” Hansen said.
Commodity analysts at TD Securities said they see gold’s move as a short squeeze adding risks to their current short position.
“We find that a rally towards the $1850/ounce handle would still be supported by the CTA short covering, which points to continued risk compression on gold if the US dollar continues to weaken. .
Silver also seems to be following in gold’s footsteps; however, short covering at the start of the rally was significantly more pronounced.
The disaggregated report showed that speculative gross cash-managed long positions in Comex silver futures increased by 2,851 contracts to 38,876. At the same time, short positions decreased by 11,976 contracts to 29,484
Silver’s net length is 9,392 contracts. Sentiment turned bullish after two weeks in bearish territory.
During the survey period, silver rallied dramatically, with prices exceeding $21 an ounce. Prices briefly pushed above $22 an ounce but have since retraced some of those gains.
TD Securities analysts said that while silver’s brief squeeze may still hold, the market needs to rise above $23 an ounce to attract big long-term bullish interest.
“While positioning risks have become more two-sided with short covering already occurring at scale, our model suggests a rally north of $23.50/ounce would still be associated with large-scale CTA buying, suggesting that the squeeze can still take its second wind,” the analysts said.
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