Gold and silver are holding critical support despite inflation fears prompting hedge funds to liquidate their bullish positions and increase speculative bets, according to the latest trade data from the Commodity Futures Trading Commission.
Money managers decreased their speculative gross long positions in Comex gold futures by 13,674 contracts to 100,642. At the same time, short positions increased by 20,219 contracts to 66,466 contracts. The gold market is now net long by only 34,176 contracts as bullish speculative positioning falls to its lowest level since Oct. 16.
Bearish momentum in gold picked up last week after the U.S. Labor Department said that its Consumer Price Index rose more than expected, increasing 3.1% in the 12 months to January. Inflation was hotter than expected, as economists were expecting the annual CPI to rise 2.9%.
Markets have pushed back the timing of a potential rate cut from the Federal Reserve. A March rate cut has been pretty much priced out of the market and there is less than 50% chance of easing in May.
Although gold prices have room to move lower, analysts see a relatively solid floor in the market as the Federal Reserve is expected to eventually ease its monetary policy.
While lackluster Western investment demand keeps a lid on prices, the market continues to be supported by robust Asian demand. Gold will likely struggle in the short term, but as the rate cut expectations are being dialed back, physical demand from central banks and retail investors, not least in China, will continue to provide a soft floor under the market.
The gold market is building momentum for a potential short squeeze as macro traders are under-positioned for the Federal Reserve’s easing cycle. This highlights a set-up for the yellow metal that is ripe with asymmetry and prone to a material short squeeze as Fed officials contemplate the start of a cutting cycle.
Along with gold, silver has also struggled as potentially higher for longer interest rates pushes the market into bearish positioning. Speculative short positioning has risen to its highest level since early March 2023.
Despite the bearish sentiment, silver prices held critical support at $22 an ounce. The precious metal bounced off a three-month low to end last week with nearly a 7% gain.
Some analysts have said that silver is a more attractive inflation hedge than gold and could start to outperform the yellow metal.
