Last time hedge funds were this bearish, the gold price was $700
The gold price jumped more than $30 or more than 2% an ounce to a near 3-week high on Tuesday as contrarian investors read plummeting net long positions held by hedge funds as a sign that big sellers of the metal have now been flushed out of the market.
On the Comex division of the New York Mercantile Exchange, gold futures for February delivery traded at $1,262.20 an ounce during early afternoon dealing, up over $30 from the $1,237.40 low struck shortly after the opening, but off the day's high of $1267,50.
Silver tracked gold's trading pattern, jumping more than 3% to a day high of $20.32, crossing the $20-level for the first time since 20 November.
Retail buying interest in precious metals came after data from US Commodity Futures Trading Commission showed hedge funds are now the least bullish on the yellow metal since 2007 when gold averaged around $700 an ounce.
So many large players short of gold could translate into further upside for the metal as commercial traders are forced to cover their positions.
Net-long positions – bets that the price will rise – fell by 16% to a mere 26,774 contracts last week data from Danish investment bank Saxo shows. Around 150,000 futures contracts are traded in gold each day.
Precious metals have been under pressure as markets believe a recovering US economy – and specifically an improved labour market as evidenced by the strong employment numbers released on Friday – could prompt the US Federal Reserve to slow the pace of its $85 billion in monthly bond purchases as soon as next week at the bank's final meeting for the year.
A stronger economy strengthens the hands of Fed members who are eager to start unwinding the near $4 trillion the central bank has taken onto its balance sheet since QE1. The Fed first embarked on its quantitative easing program in December 2008 when gold was trading around $830 an ounce.
But many market watchers now believe the impact on the gold market of the eventual QE taper announcement would be minimal.
The dreaded taper has been signposted for months and should now be baked into the gold price. What's more, with the big money managers who have been dumping metal at every opportunity out of the market, a big source of selling pressure has been removed.
Evidence that large investors are abandoning precious metals also came from the silver market where sentiment turned negative – a net short position – by the largest margin since the data was first collected in 2006. Silver breached $10 an ounce for the first time that year, ending 2006 at $12.80.
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