(Kitco News) – Shifting interest rate expectations surrounding the timing of the Federal Reserve’s first rate cut of its impending easing cycle are taking their toll on gold and silver as hedge funds start to increase their short positions, according to the latest trade data from the Commodity Futures Trading Commission.
Analysts note that gold is being weighed down, as pared-back rate cut expectations support the U.S. dollar.
“It’s been a disappointing start to the year for precious metals bulls, many of whom have been anticipating a strong rally across the sector in 2024. But the dollar’s recovery since late December continues to put downside pressure on prices. We’ll see if this dynamic changes in the coming weeks and months,” said David Morrison, senior market analyst at Trade Nation.
The CFTC’s disaggregated Commitments of Traders report for the week ending Jan. 16 showed money managers decreased their speculative gross long positions in Comex gold futures by 3,402 contracts to 130,931. At the same time, short positions increased by 1,828 contracts to 47,702 contracts.
The gold market remains net long by 83,229 contracts, roughly unchanged from the previous week. During the survey period, gold prices continued to consolidate in the broader range between $2,050 and $2,000 an ounce.
“Doubts surrounding a prompt and aggressive Fed easing, following somewhat hawkish comments from fed officials, prompted specs to aggressively cut gold long positions. Money managers hypothesized that the cost of carry and opportunity may remain high for longer and the Treasury market sold off during the tail end of the CFTC reporting period,” said commodity analysts at TD Securities in a note Friday.
Solid economic data last week pushed market expectations for a rate cut in March to nearly a 50/50 coin toss. Projections dropped significantly from an 80% chance priced in the previous week.
Analysts at TDS said that if gold is going to find its footing, the market needs to see materially weaker economic data.
“Only weaker US data is likely to convince the Fed to tilt toward the dovish side. This implies that a convincing upward trend to our $2,200 average price next quarter is unlikely to develop until then,” the analysts said.
Despite the headwinds, some analysts continue to see bullish potential for the precious metal. In recent comments to Kitco News, James Stanley, senior market analyst at Forex.com, said that gold’s price action is creating a lot of pain for bearish investors. He noted that solid selling pressure has been met with robust buying.
“I think that short play is going to continue to be painful,” he said. “If/when it breaks down, the sell-off could be sizable, but those bear traps have made sellers pretty cautious. So much bait has been set for sellers to chase breaks, and then we see a massive move to the upside.”
Nicky Shiels, head of metals strategy at MKS PAMP, said the negative sentiment in the marketplace is creating asymmetric risks for gold.
At the same time, some analysts have said that geopolitical uncertainty, due to ongoing chaos in the Middle East, and fears of a recession continue to support long-term gold prices.
It’s not just gold that is struggling. The trade data shows hedge funds increasing their bearish bets in silver.
The disaggregated report showed that money-managed speculative gross long positions in Comex silver futures fell by 694 contracts to 31,698. At the same time, short positions rose by 1,431 contracts to 25,475.
Silver’s net length now stands at 6,223 contracts, roughly unchanged from the previous week, which recorded a sharp drop in bullish positioning.
During the survey period, silver prices held critical support above $23.00 an ounce.
However, at the start of a new trading week, silver is seeing solid selling pressure, with prices falling to a three-month low, testing support near $22.00 an ounce.
Along with shifting interest rate expectations, the silver market is struggling as a weakening Chinese economy weighs on the precious metals industrial demand.
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