Hedge funds catching up to gold, silver price rally

On Monday gold futures again flirted with the psychologically important $1,200 an ounce level, consolidating at three-week highs.

In late afternoon trade on the Comex division of the New York Mercantile Exchange gold for February delivery – the most active contract – was changing hands for $1,198.80 an ounce after bouncing off resistance at $1,208.

March 2015 silver contracts gained slightly to trade at $16.50 an ounce on Monday, up just over a dollar since hitting 55-month lows November 6.

Gold is now up 6% since touching a four-year low little over two weeks ago and it appears large investors are now beginning to catch up to the rally.

Speculators in gold futures and options upped their bullish bets a whopping 55% last week, by cutting back shorts from near record levels reached in October and adding to long positions at the same time.

Net long positions held by large investors like hedge funds jumped to just over 60,300 contracts or 6m ounces in the week to November 18 according to Commodity Futures Trading Commission data.

That's more than double the number of bets that prices will rise held by speculators a year ago, when gold was hovering near the same levels.

Silver price speculators also moved into a net long position, albeit tiny, from an overall short the week before.

Hedge funds' bullish positioning in silver is still down dramatically from record longs of 46,795 or 240 million ounces in July.

Unlike hedge funds retail buyers did not increase their exposure to gold. Holdings in the bellwether exchange traded funds backed by physical gold – SPDR Gold Shares (NYSEARCA:GLD) – declined by two tonnes last week.

GLD which listed 10 year ago represents nearly 50% of the gold-backed ETF market.

Despite gold's fight back in November, 20.3 tonnes has left the fund this month. So far in 2014 investors have pulled 77.3 tonnes from GLD.

Holdings in GLD peaked in December 2012 at 1,353 tonnes or 43.5 million ounces.

Silver-backed ETFs reached a record 20,182 tonnes in October this year, but has since pulled back sharply.

Barclays said in a research note on Monday that "if the gold price were to fall to $1,000/oz, an additional 100 tons would become cash negative:

“On a gross basis, almost 900 tons of gold were accumulated between $900-1,000/oz, or almost 700 tons on a net basis, and this represents the early money in gold. Perhaps more worrisome is the amount of cash-negative silver held in physically backed ETPs.

More than 9,000 tons of silver was accumulated above $30/oz on a gross basis and, taking into consideration net outflows, at least 7kt (7,000 tons) is loss-making at current price levels, assuming last in, first out. If we assume shares that have been redeemed were those first in, then 19kt of metals held in trust is loss making.”

Image of open outcry commodities trading at the Chicago Board of Trade in 1988 by Greg Wass