COT update: Dollar bulls retreat as metals attract fresh demand

Commodities

A mixed week across commodity sectors saw the Bloomberg Commodity Index fall 1.2% during the reporting week to 4 August, as weakness in energy and grains was only partly offset by strength in precious and industrial metals and soft commodities. Hedge funds responded to these developments by cutting length in energy, most notably Brent and natural gas, as well as grains led by soybeans and wheat, while increasing demand for all metals and some softs.

Energy positioning continues to highlight relatively subdued conviction in higher prices despite multiple war-related disruptions to supplies from Russia and the Middle East. In contrast, precious metals saw renewed buying, while copper length reached a multi-year high.

The resilience of official-sector and Asian demand echoes 2022–23, when aggressive central bank rate hikes failed to trigger the deep and prolonged gold correction many Western investors had anticipated. It also highlights a continued divergence between East and West. While central banks and Asian investors accumulate gold, many Western asset managers have remained cautious amid elevated bond yields and funding costs.

Looking ahead, mounting fiscal debt concerns, a softer dollar, continued central bank demand and growing speculation that the Fed under Kevin Warsh may refrain from further rate hikes all support a constructive medium-term outlook. A recovery in Western investment demand, combined with sustained official-sector and Asian buying, could provide the catalyst for the next leg higher. After months of sideways trading, focus has shifted to whether gold can sustain its breakout. Support at USD 4,200 is key in our opinion, while a break above USD 4,383 may pave the way for a move towards the 200-day moving average near USD 4,500.

Key positioning changes:

Crude oil: Renewed price weakness drove a 25k reduction in the combined crude net long to 266k contracts, following 171k of net buying during the previous three weeks. Despite persistent geopolitical supply risks, positioning continues to signal limited conviction in a sustained price rally.

Natural gas: The net short reached a 27-month high at 89k contracts as ample supply and inventories well above seasonal averages continued to weigh on prices.

Gold: Ahead of Wednesday’s technical upside break, managed money accounts had already lifted their net long to a January high of 132k contracts. Short covering played a significant role, with gross shorts slashed by 42% to a 19-month low of just 9.4k contracts.

Silver and platinum: The silver net long jumped 32% to a still relatively subdued 11k contracts as fresh longs were added, while platinum length surged 71% to a two-month high of 10.9k contracts.

Copper: A 4.5% rally during the reporting week, which subsequently extended to a record high, helped lift the net long to a 5½-year high of 77.8k contracts. The market is increasingly caught between the US, where imports continue to surge as traders capture tariff-related arbitrage opportunities, and China, where demand for imported refined copper is accelerating amid constraints on mined supply and scrap availability.

Grains: Except for corn, the sector saw broad selling, although the combined 73k reduction was relatively modest compared with the 542k contracts speculators had added during the previous five weeks. Most notable was a sharp increase in the CBOT wheat net short following the late-July price slump, despite ongoing concerns about Black Sea shipping disruptions and the reliability of exports from Russia and Ukraine.

Sugar: Ahead of the near-10% surge since last Tuesday, hedge funds had already cut their net short by 31% during a reporting week in which prices rose 3.4% - a warm-up for the rally that followed. Prices are being supported by disappointing Brazilian production prospects, tightening availability in India, where stocks have reportedly entered the new season near a 30-year low, and rising El Niño-related supply risks. Together, these developments have forced an increasingly uncomfortable short position to be covered.

Elsewhere: The cotton net long reached a 16-month high, while six consecutive weeks of net selling cut the live cattle net long to a 22-month low.

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.