Large speculators flipped to a net-bearish position in gold futures for only the second time ever in one Commodity Futures Trading Commission report, while further slashing their net long in another, according to the most recent data compiled by the government agency.
Most of the change was driven by fresh selling, rather than traders exiting bullish positions, as had been the case for much of the previous few weeks. However, this in turn creates potential for short covering in metals as bearish traders either book profits or exit to avoid losses if the market reverses against them, analysts said.
The move came as traders factored in expectations that the Federal Open Market Committee will hike U.S. interest rates next month. This has boosted the U.S. dollar.
“An adjustment in positioning was warranted, as market participants anticipate a December
Fed rate hike,” UBS said. “But the speed and magnitude of the washout – and particularly the
increase in gross shorts – raises possible short-covering risks up ahead.”
Further, with traders having already given up the large net-long position from just a few weeks ago, this “reduces the risk of a pronounced downside response should the Fed start tightening in December than
would have been otherwise,” UBS added. “At the same time, lighter positioning creates better conditions for a post-rate hike recovery, particularly if the Fed signals a slower pace after lift-off.”