COT: Trade hopes cut demand for gold; Oil bought again.

Ole Hansen

Head of Commodity Strategy

Summary:  COT on commodities in week to November 5 showed how trade hopes and weather developments drove position changes from oil and natural gas to gold and coffee


Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 commodities futures up until last Tuesday, November 5. The reporting period covered a week where trade deal optimism continued to run high with stocks and bond yields both rising while the prospect for further U.S. rate cuts continued to deflate.

Just two months ago the appetite for key commodities among speculators, i.e. leveraged money managers or hedge funds, hit rock bottom. Back then the net-long across the 24 major futures tracked in this report dropped to a record low of just 38k lots. While the Bloomberg Commodity Index since then has only managed to recover by 2.2% the net-long has nevertheless jumped and last week it reached 587k lots, a 15-week high.

Conflicting news on tariffs roll back created a very volatile week for gold and silver. Ahead of Thursdays additional weakness the net longs in both had been cut primarily through increases in gross short positions. In gold the gross short jumped by 15% to 31k lots, a 22-week high. Both metals have been challenged by the recent rise in bond yields which have cut the total amount of negative yielding debt globally to $11.6 trillion, a one-third reduction since the August 28 peak. The improved outlook for has also led to a reduction in U.S. rate cut expectations. 

Despite its worst weekly decline since November 2016 gold has yet to break any major technical levels. Using retracement levels from the run up since May the levels we focus on are $1448/oz, $1413/oz and most importantly $1380/oz, the range top between 2014 and June this year. 

Continued copper buying reduced the net-short to 18k lots, the lowest since April 30. Another sign that the market is sensing a change in the outlook and with that reduced appetite from macro funds to hold short copper positions as a hedge against an economic slowdown. However having failed last week to break above the 200-day moving average at $2.7280/lb and with the speculative short much reduced the short-term outlook could now become more challenging.

Bets on rising energy prices rose by more than 100k lots in the week to November 5. Trade optimism and the prospect for further OPEC supply cuts supported a third weekly increase in WTI (+12k lots) and Brent (+28k lots) crude oil longs. During the past three weeks funds have bought 109k lots, still less than the 180k lots that was sold the previous three weeks.

A November chill across the eastern U.S. has helped lift natural gas prices and demand and as a result the net-short was halved last week.

Speculators cut short positions in Arabica coffee by 30% as the market tightens on concerns adverse weather in Brazil will lower yields. 

Hedge funds have due to the forward curve structure been holding a profitable net-short in coffee since 2017. The short periods of recovery during this time has mainly been driven by short-covering and whether this time is any different remains to be seen. Support has however started to emerge with the outlook for a rising supply deficit into the 2019-2020 season from a surplus the previous period. 

The cotton short more than doubled ahead of Friday’s price supportive WASDE report in which it delivered a bigger-than-expected cut to US and global supplies.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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.
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