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COT: Speculators add further fuel to gold rally

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities, forex and bonds during the week to last Tuesday, November 28. A week that saw a continued bond market rally and a softer dollar support risk sentiment across markets, except the commodity sector which saw broad losses led by energy and grains more than offset continued buying of gold and silver


Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.

What is the Commitments of Traders report?


The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and bonds in the week to last Tuesday, November 28. A week that saw the biggest bond market rally in years receive some additional tailwind after Fed Governor Waller, normally a reliable hawk, suddenly converted to the dovish camp, and the market concluded that Waller would not have expressed such a major change in stance without a nod from Fed chair Powell. Global stock markets continued their early Santa rally supported by the mentioned drop in Treasury yields and rising rate cut expectations, the dollar slumped while the commodity sector traded lower with led by broad losses in energy, copper, grains, and livestock. 

Commodities:


The commodity sector traded lower, with the Bloomberg Commodity index suffering a 1% loss with 18 out of the 24 major commodity futures tracked in this update trading lower on the week, led by natural gas, crude oil, grains, and livestock. Among the few commodities showing gains we find gold and silver as well as cocoa and coffee. Overall, the net selling from speculators was concentrated in natural gas, corn, soybeans, wheat, sugar and hogs. 

Note on gold.


Since the cutoff last Tuesday, when gold closed at $2040, the yellow metal continued higher, supported by the rally in bonds and softer dollar following Waller’s dovish comments. On Friday Fed Chair Powell tried but initially failed to dial back bullish expectations, the result being a record closing high leading to follow-through buying in Asia overnight to a fresh record above $2030. Speculators, such as hedge funds & CTAs, as seen in the table below, remain the key drivers behind the latest run up in gold with ETF investors, such as long-only asset managers, selling into the rally. With five rate cuts fully priced in for 2024, there is little room for error in the short-term, and it raises the risk of disappointment should incoming economic data fail to support the current gold bullish narrative. Speculators are not 'married' to their positions and will adjust if the technical and/or fundamental outlook changes. 

We maintain a bullish outlook for gold into 2024 in the firm belief that rates have peaked, and that Fed funds and real yields will continue to trend lower. However, with a great deal of easing already priced into the market, the chance of a straight-line rally is unlikely, and both silver and gold will continue to see periods where convictions might be challenged. It is also worth noting the continued lack of demand from ETF investors, not least asset managers who remain sidelined amid the wide gap between gold and US real yields as well as the current high cost of carry which will only come down when the Federal Reserve starts cutting rates. 

From a technical perspective spot gold reached a Fibonacci extension target overnight at $2130, and while a golden cross between the 50- and 200-day moving averages support the bullish setup, a pull back towards $2057 (38.8% Fibo) or even $2033 (50% Fibo) cannot be ruled out in the short term.

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Energy: WTI was sold and Brent bought ahead of last week’s delayed OPEC+ meeting. Overall, the belief in higher prices remained low with the combined long at 265k being near the lowest of the year. Products meanwhile were bought with support from an extended refinery maintenance season while the short sellers lifted the natural gas short.
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Metals: Gold length jumped 26% to 144k lots, a six-month high, silver up 55% to 26k and not far below the year high around 30k, platinum flipped back to a net long while copper length was reduced ahead of upside break.
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Grains: The corn net short at 206k was the highest since June 2020 and biggest ever short held in late November. Overall, the sector saw broad selling with BCOM grains index suffering a 2.4% loss in the week.
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In softs, the coffee net long was unchanged ahead of a tight supply-led surge while the sugar net long slumped to a three-month low. In livestock, the cattle long fell to a 13 month low while the hog position flipped back to a net short.
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In forex we saw continued dollar selling with the gross long vs eight IMM futures and DXY cut in half to $3.8bn, down 2/3 in just two weeks. Led by demand for EUR ($1.9bn eq), GBP ($1.4bn) & AUD ($0.4bn). To partly offset there were small selling of JPY, CHF and NZD
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In bonds, the bull steepener that followed dovish comments by Fed Governor Waller saw leveraged fund funds cover short positions across the curve, most aggressively at the front in 2’s and 5’s, while the SOFR net long reached a fresh record high. Overall, the DV01 (value of 1 bp move) was cut by just $21 million to -$429 million, with the corresponding long position being held by asset managers and other reportables

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