Metal positioning points to risk of short squeeze

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  Precious metals as well as platinum and palladium trade higher despite Friday’s Jackson Hole remarks from Jerome Powell, the Fed chair, which on balance was seen to be hawkish as they signalled a further delay to the timing of the first rate cut. After initially dipping on the news, the mentioned metals soon recovered thereby preventing a change in the recent positive sentiment, that so far has been led by silver, and supported by copper strength in anticipation of additional economic support from the Chinese government. In this we take a look at the potential impact of short covering from leveraged funds who for weeks have been net sellers

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Precious metals trade higher despite Friday’s Jackson Hole remarks from Jerome Powell, the Fed chair, which on balance was seen to be hawkish as they signalled a further delay to the timing of the first rate cut. In the keynote speech, Powell stuck with the central bank’s long-term inflation target of 2% and it led him to say that the Fed was still a long way away from achieving that goal.

While the market concluded these meant rates would stay higher for longer, Powell did however also add the Fed will continue to focus on incoming data and take a careful, measured approach to further policy tightening. After initially dipping on the news, precious metals soon recovered thereby preventing a change in the recent positive sentiment, that so far has been led by silver, and supported by copper strength in anticipation of additional economic support from the Chinese government. 

With precious metals, and platinum group metals showing signs of stabilizing following weeks of weakness, the attention has turned to speculators and the positions they hold across the different metal futures. Surging bond yields and a recovering dollar has for the past couple of months been the main drivers behind the weakness across the investment metal sector, and the negative momentum seen during this time has attracted selling interest from hedge funds and other leveraged traders in the futures market. 

Do note that this group of traders 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.

Leverage fund positions broken down in gross long/short and net positions across gold, silver, copper, platinum and palladium

Data from the most recent Commitment of Traders report, covering the week to August 22 showed some emerging buying interest, especially in contracts where short positions were or had been held. The continued strength seen in the days that followed could indicate reduced belief in lower prices, and while it may add a bid to the market from the reduction of short positions, more work needs to be done for sentiment to turn positive. 

Below we take a closer look at technical price developments with support from Kim Cramer, Saxo's Technical Analyst Expert. 

GOLD: Spot gold trades within a narrowing range, currently between $1890 and $1950, with the recent break above the 200-day moving average not giving the market a necessary boost. The 38.2% retracement of the July to August weakness is currently providing some resistance at $1924 while a move to higher prices needs confirmation above $1950. Five weeks of aggressive selling up until August 22 had cut the net long by 81% to a March low at 26k contracts, while the naked or gross short position had risen three-fold to 90k contracts, also the highest since March. From a technical perspective a break above the mentioned $1950 level would likely trigger added strength from short covering and fresh momentum buying. - Source: Saxo
SILVER: Spot silver is holding above the 61.8% retracement of the July to August sell off, currently offering some support at $24.08, and with RSI trading above 60, the positive sentiment has returned. On the weekly chart silver has strong support around $22.15 and is forming an ascending like triangle which is offering strong resistance at the April and May highs above $26. Source: Saxo
PLATINUM: Platinum as well as palladium are showing signs of strength, potentially at this stage driven by weak shorts being forced to exit. Spot platinum has been rising in nine out of the last ten trading session, and so far, this month the discount to gold has narrowed by 75 dollars to 945 dollars, a two-month high. The move was set in motion after the white metal for a second time in two months found support below $900, and it strengthened once it broke the falling trendline. A close above the July high at $995, which is also the 200-day moving average may confirm the mentioned double bottom pattern with $1042 being the next level of resistance. Speculators again plays an important part in the recent recovery after being forced to reduce an elevated net short position, last at 11k contracts. Source: Saxo
PALLADIUM: For the past two months, the silvery-white metal has been trading in a sideways channel between $1200 and $1345 with a breakout needed for direction. After reaching a record high at $3425 on March 7 last year, the price has since collapsed by more than 60% to trade near levels last seen in late 2018. The net short held by speculators recently reached a record high at 9.7k contracts, a considerable one-sided bet given the size of the market from a daily traded volume perspective, potentially leaving the metal exposed to short covering. While the daily chart highlights the sideways pattern, it also shows a current challenge of the downtrend from the last October. A break higher may trigger a move to the $1454-$1535 area. Likewise, a bearish breakout could see it run lower towards the $1100-$1000 area. Source: Saxo

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