Hedge funds avoid gold, but silver and copper shine bright as inflation threat grows
(Kitco News) - Hedge funds remain reluctant to jump into gold; however, silveris attracting new momentum as its industrial demand picks up, according to someanalysts quoting the latest trade data from the Commodity Futures TradingCommission.
Analysts have noted that rising inflation fears have sparkedrenewed interest in base metals; at the same time, depleted inventories asdemand picks up have created a significant supply/demand imbalance. Copper andsilver have both seen a rise in bullish interest as investors look forinflation hedges.
Analysts noted inflation fears are at their highest level in 16years, indicated by five-year breakeven rates. The breakeven rate is the differencein yields between bonds and Treasury Inflation-Protected Securities (TIPS). Thedifference represents the inflation rate needed to equalize their returns. Asof Friday, the five-year breakeven rate was 2.91, near the highest level since2005.
The CFTC disaggregated Commitments of Traders report for the weekending Oct. 19 showed money managers increased their speculative gross longpositions in Comex silver futures by 2,593 contracts to 50,040. At the sametime, short positions fell by 11,788 contracts to 30,603.
Silver's net length now stands at 19,437 contracts. Ole Hansen,head of commodity strategy at Saxo Bank, noted that silver's net length hasmore than tripled from the previous week.
During the survey period, silver prices pushed to nearly asix-week high above $24 an ounce. Analysts expect hedge funds to have added totheir bullish bets as prices have rallied above $24.50 an ounce.
Many analysts have noted that silver is being pulled up by newmomentum in base metals as copper prices took a run at their record highs fromMay. Hedge funds increased their bullish bets in copper as inventories asLondon Metal Exchange warehouses dropped to their lowest levels since 1974.
Copper's disaggregated report showed money-managed speculativegross long positions in Comex high-grade copper futures rose by 15,981contracts to 81,574. At the same time, short positions fell by 2,567 contractsto 28,400.
Copper's net length is currently at 53,174 contracts, increasing53% from the previous week. During the survey period, copper prices brieflyrallied above $4.80 a pound.
"The red metal's particularly depleted inventory levels werea key reason why speculators targeted copper in the panic buying frenzy, butthe increasingly notable demand headwinds and spreading of the energy crisisinto downstream sectors can ease the upside pressure," said analysts at TDSecurities.
Although copper's supply and demand fundamentals could continueto support prices, Daniel Briesemann, base metals analyst at Commerzbank, warnedthat the market appears to be oversold.
"Copper was also technically overbought for a time duringthe week under review, as can be seen from the relative strength index. Thisgroup of [speculative investors] is likely to have taken profits in the meantime,thereby contributing to the subsequent price slide," he said.
Compared to silver and copper, the gold market was extremelyquiet during the latest CFTC survey period.
The disaggregated report showed that money-managed speculativegross long positions in Comex gold futures fell by 7,108 contracts to 124,560.At the same time, short positions dropped by 6,388 contracts to 66,761.
Gold's net length stands at 57,799 contracts, relativelyunchanged from the past three weeks. During the survey period, goldgold pricesmanaged to hold support above $1,750 an ounce. Still, prices were unable tobreak above resistance at $1,800.
Analysts have said that the gold market suffers lacklusterinterest as investors focus on the Federal Reserve tightening its monetarypolicy. The U.S. central bank is expected to reduce its monthly bond purchasesbefore the end of the year and raise interest rates by 2022.
However, some analysts have said that rising inflation will keepreal interest rates near historically low levels even as the Federal Reserveraises interest rates.
Analysts at TD Securities said that market expectations of U.S.monetary policy appear to be a little too hawkish, which could be supportivefor gold.
"While gold has historically outperformed most asset classesin periods of high inflation, investors have remained cautious about the yellowmetal as they remain intensely focused on the Fed's exit. In fact, speculatorshave only marginally added to their length in this context, despite the powerfulmove in inflation expectations, with modest short covering as prices edgehigher. We argue that market pricing for Fed hikes has become far too hawkish,since it fails to consider that the Fed's tools are unlikely to be deployed tocombat inflation tied to lingering supply chain shortages," the analystssaid.
By Neils ChristensenFor Kitco News
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