Large speculators upped their collective bullish positioning in gold futures but trimmed their net length in silver, according to the most recent weekly report released by the Commodity Futures Trading Commission.
The data covers the week to Tuesday, Aug. 23. During this period, Comex December gold fell to $9.90 to $1,341.40 an ounce, while December silver prices slid $1 to $18.92.
Net long or short positioning in the CFTC report reflects the difference between the total number of bullish and bearish contracts. Traders monitor the data to gauge the general mood of speculators, although excessively high or low numbers are viewed by many as signs of overbought or oversold markets that may be ripe for price corrections.
The commission issues two reports each Friday — a so-called “legacy” report and a “disaggregated” report, started in 2009 and meant to offer more detail.
The disaggregated report shows that money managers upped their net-long, or bullish, positioning in gold futures to 253,684 contracts in the week to Aug. 23 from 242,727 as of the week before. There was an increase in fresh buying, as reflected by a rise of 7,398 total longs to 284,550. Also, there was short covering, or buying to offset a position in which somebody previously went short, or placed a bearish bet. This was reflected by a 3,559-lot decline in gross shorts to 30,866.
Speculators upped their net-long positioning as many in the market believed that a correction may have been overdone given continued ambiguity on the Federal Reserve’s interest-rate policy, said a research note from TD Securities.
“However, following developments (at a weekend Fed symposium) in Jackson Hole, gold specs may again start to cut their long exposure and build shorts in response to a growing narrative that that the U.S. central bank may be once again seriously considering a rate hike in 2016,” TDS continued. “Still, (with) the ever-present economic and system risks, along with the Fed skittishness when it comes to rising rates, investors are unlikely to get too extreme in their net-long position downward adjustments.”
Sean Lusk, director of commercial hedging with Walsh Trading, pointed out that some of this newfound net length may have been liquidated already as gold fell during the latter part of last week in the run-up to Fed Chair Janet Yellen’s speech Friday at Jackson Hole. Still, Lusk said, “there is still a sizeable long in this market that could come undone following next Friday’s (U.S. nonfarm payrolls) jobs number, should it exceed expectations.”
In silver futures, money managers cut their net long to 76,387 futures contracts as of Aug. 23 from 81,456 the week before. There was long liquidation, as gross longs declined by 1,891 lots to 96,876. In addition, there was also some fresh selling, as reflected by a 3,178 rise to 20,489.
Silver has been the star performer of the metals so far, enjoying a spectacular rally of 21.5 percent in the second quarter after a gain of 11.3 percent in the first, principally due to a strong rebound in speculative and investor demand. We expect outperformance in silver prices to continue in the third quarter thanks to a cautious Fed but renewed selling pressure could appear in the fourth quarter due to weaker industrial demand and a possible pick-up in speculative and investor selling. In the meantime, silver appears overbought for this quarter and a possible spike above $22 should attract hedge selling.
Overall trend – In line with our expectations, silver prices rose to a fresh 2016 high in the second quarter due to stronger investor and speculative demand amid a supportive macro environment for precious metals. Silver also outperformed gold because the gold-silver ratio was historically too high, as we highlighted in our last report. It averaged 79 in the first quarter but has since reverted toward its longer-term (1980-present) average of 62, helped by reduced risk aversion – the VIX dropped to 15.69 in the second quarter from 20.54 in the first quarter. Silver might continue to perform better than gold in the third quarter because we expect the Fed to remain on hold and not adjust the market’s expectations about rate rises due to elevated uncertainty about the US outlook after recent disappointing data. But similarly to gold, we expect downward pressure in silver prices in the fourth quarter because US real interest rates are likely to bottom out once the Fed becomes more confident about preparing the market for a steeper path of rates. Although silver mine production may fall in 2016 after being stable last year, silver prices are likely to suffer from stronger scrap supply triggered by higher prices, weaker industrial demand – accounting for 54 percent of total silver demand – and renewed investor and speculative selling. We expect a $17 – $24 per ounce range in the third quarter.
ETF investors bought 302 tonnes in the second quarter after a record 745 tonnes in the first. Silver ETF demand is set to remain solid in the third quarter amid a supportive macro environment but some profit-taking is likely in the final quarter of the year, we feel.
Money managers bought 4,712 tonnes in the second quarter and 5,284 tonnes in the first on Comex after selling 943 tonnes last year. Although spec positioning is clearly stretched on the long side, further spec buying is possible in the third quarter but should turn into strong selling in the fourth quarter, depressing prices.
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