Hedge Fund Short Covering Continues To Drive Gold Market – CFTC

(Kitco News) - For the second consecutive week, some hedge funds and money managers covered their short positions and continued to test gold’s investment waters, according to the latest data from the Commodity Futures Trading Commission (CFTC).

For the week ending Sept. 29, the disaggregated Commitment of Traders Report (COTR) showed money-managed speculative gross long positions of Comex gold futures rose by 5,102 contracts to 112,633. At the same time, gross shorts fell by 14,633 contracts to 72,069. The latest data show the gold market is net long by 40,564 contracts. The market’s length increased by more than 48%, compared to the previous week.

During the survey period, December gold futures were relatively unchanged, showing a 0.2% gain; however, that doesn’t highlight the high volatility seen during the five-day trading period, especially after strong technical buying pushed gold to a four-week high above $1,150 an ounce in late-September.

In a research note Monday, analysts at Barclays said that the recent short covering has helped push speculative interest further away from extreme bearish positioning; however, there is still significant negative sentiment in the marketplace, they added.

“The managed money net long remains near the historical low even after the pull-back, with COMEX trading volumes also soft, indicating still negative sentiment towards gold from investors,” the analyst said.

Jonathan Butler, precious metals strategist at Mitsubishi, noted in a report Monday that gold gross longs are 76% off their record levels and gross shorts are 70% from their all-time highs.

The question now being asked by analysts is how Friday’s weaker-than-expected September nonfarm payrolls report has impacted speculative positioning.  Gold rallied more than 2% on Friday after U.S. data showed only 142,000 jobs were created in September. Economists were expecting to see job growth of 200,000.

The near $30 move in Comex gold futures on Friday wasn’t part of the latest survey and traders will have to wait until updated numbers are released at the end of the week to see how the market has shifted.

Bart Melek, head of commodity strategy at TD Securities, said that he suspects the latest rally in gold continues to be the result of short covering. He explained investors are being less aggressively bearish on gold as it looks more likely that the Federal Reserve will not be hiking interest rates in 2015.

He added that in the near-term continued short covering could help push prices back to the August highs of $1,169 an ounce, but new momentum would be needed to get prices above that first resistance point.

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, agreed that gold prices have room to move higher as a result of shifting speculative positioning, but the market still lacks the fundamental strength to attract long-term investors back to the marketplace.

He reiterated that gold prices need to push back above $1,200 an ounce to encourage more capital allocation from hedge funds and money managers. Until then, gold will remain off investors’ radars, he added.

While some investors are becoming slightly less negative on gold, hedge funds remain bearish on silver, establishing new short positions, according to the CFTC data.

The disaggregated COTR showed money-managed speculative gross long positions of Comex silver futures fell by 64 contracts to 43,252. At the same time, short contracts rose by 5,294 contracts to 33,610. The silver market net length now stands at 9,642 contracts, a fall of almost 36% from the previous week.

Despite the fresh bearish bets, the silver market managed to attract some short covering as Comex December silver futures briefly rose above $15 an ounce; however, by the end of the five-day trading period, December silver was down a total of more than 1%.

Melek noted that a sharp drop following the early rally, prompted money manages to increase their short exposure.

Courtesy: Kitco News