Gold and silver could see a near-term pullback

Ending five weeks of increases, net speculative length for COMEX gold fell 38.2 tonnes this past week. The change in the net position was largely the result of speculative longs being unwound. The increase in short positioning continued for a second week. The decline in net speculative length affirms our suspicion that the aggressive moves at the end of January were largely as a result of overexcitement after the Fed’s dovish announcement.

Consequently, we remain cautious of gold’s near-term prospects, and would not be surprised to see further weakness emerge this week. ETF buying also continues to decelerate. A meagre 0.8 tonnes were added to gold holdings. We maintain that gold will reach new highs in 2012, probably towards Q3. However, we’re still avoiding an overweight position in gold. Given that we see fair value for gold at $1,640, we would look to establish tactical longs between $1,590 and $1,620.

COMEX silver net speculative length continued to improve, marking a seventh week of successive gains, with a 262.0 tonne increase. This brings the total net speculative length added this year to 2,773.3 tonnes. Unlike in the previous week, this time the improvement was largely as a result of a marked decline in short positions — 206.2 tonnes. A healthy 55.8 tonnes were added to longs. Futures market positioning remains the strongest it has been since the dramatic fall during late September last year (and at 4,546.0 tonnes, net
speculative length is largely in line with last year’s average). If we see a continued strengthening of investment demand, this could help prices shrug off some of the negativity of a weak outlook for industrial demand.
After a stellar two weeks of buying, ETFs turned net sellers, with 106.2 tonnes shed from holdings this past week. Perhaps investors remain uncertain about silver’s prospects.