Can gold withstand a FED-induced short squeeze?

Sentiments regarding gold and silver is quickly shifting, as indicated by the aftermath of the most recent Federal Reserve’s policy decision.

Although the Commitment of Traders’ latest reports indicates a slight rise in sentiments for silver, and gold analysts points out that the data is not forward-looking as prices have rebounded, trading at a 3-week high.

Analysts indicate that gold is experiencing a relief rally because traders and investors expected the Federal Reserve would be more hawkish this week. Analysts stated that the U.S. central bank has shifted slightly in its policy, despite its aggressive tightening.

Jerome Powell, the Federal Reserve Chair, stated that would be appropriate for the central bank to slow down the fluctuations in rate increases as the economy reacts to its monetary policy.

“After the massive liquidations of late and Fedspeak noticing the market moving away from pricing a 100 Basis-point (BP) increase, long positioning in yellow metal quickly rebounded after prices surpassed the US$1700/oz mark. Gold bugs also received relief after the FED raised rates 75bp and Chair Powell indicated that the FED might slow in future meetings. The resulting short covering has seen prices surge at the end of the week,” stated commodity analysts at TD Securities.

According to the CFTC report, money managers increased their speculative long Comex gold futures positions by 1,160 contracts to 92216. Short positions rose faster, increasing by 1,515 contracts to 112,309.

The net short position of gold increased by 19,093 contract. The survey period saw gold prices drop below US$1,700 for a brief period, reaching a one-year low. In the past five weeks, the bearishness of gold prices has increased. Analysts noted, however that gold seemed overbought and ready for a quick squeeze.

TD Securities stated that prices can move higher but they have taken a tactical long position in gold because the market is looking overbought after the FED bounce.

Analysts stated that they entered into a tactical short position for gold in anticipation of FED expectations being rebuffed, which will lead to continued outflows and lower prices.

Futures chief executive Phillip Streible said that he would take profits as gold prices spike to US$1,800 an ounce in a recent interview.

Streible said that the markets might be anticipating a U.S. central banking pivot a bit too soon. Streible noted that inflation data from the most recent month shows that consumer prices are still high, which could make it more difficult for the FED to keep its aggressive stance for longer than expected.

Hedge funds are also bullish on silver, just like gold. According to the disaggregated report, money-managed speculative gross long Comex silver futures positions rose by 310 contracts, to 36.721. Short positions rose by 4,087 to 54,539.

Silver’s position is net short of 17,818, an increase of 26% over the previous week. Silver prices maintained support at US$18 per ounce over the survey period.

Silver has experienced a similar rise to gold following the last week’s interest-rate hike. The ratio of gold to silver has fallen from its two-year peak, but it is still elevated approximately 87 points.

Silver prices currently trade at US$20 an ounce. However, analysts worry that this rally may not be sustainable as the threat to a recession increases.

Recessions would result in lower industrial silver use, which accounts for more than half of the precious metal’s total demand.