COT: Metals sold with rising yields posing a threat

Ole Hansen

Head of Commodity Strategy

Summary:  The Commitments of Traders report covering commodity positions held and changes made by money managers in the week to August 11. A rise in U.S. bond yields helped trigger profit taking across interest rate sensitive sectors, such as precious metals. The Dollar index rose by 0.3% with a record euro long raising concerns about a correction, not only in forex but also among commodities sensitive to sudden dollar strength.


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.

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, August 11. It was a mixed week in terms of market action with another dose of vaccine hopes and better-than-expected economic data supporting a 0.9% rise in the S&P 500 to move within a whisker of its February record.

A 13 bp rise in U.S. 10-year yields and a removal – using Fed Funds futures – of the risk that the Fed will move towards a negative-rate policy, helped trigger profit taking across interest rate sensitive sectors, such as precious metals. The Dollar index rose by 0.3% with a record euro long raising concerns about a correction, not only in forex but also among commodities sensitive to sudden dollar strength.   

The Bloomberg Commodity Index dropped 1% during the week to August 11 with rising bond yields and a stronger dollar reducing the appeal, not least for metals from gold and silver to copper. Fifteen out of 24 the commodity futures tracked in this report traded lower while speculators, despite the weakness, added risk in a majority of the contracts. Most noticeable Brent crude oil, natural gas, soft commodities and livestock. Biggest reductions were seen in WTI crude oil, gold, silver, copper, soybeans and wheat.

Energy: The combined crude oil net-long rose by 4,4k lots to 546k lots with a 12.7k lots reduction in WTI crude oil being more than off-set by a 17,1k lots increase in Brent crude oil. Following the April to June surge, both crude oil contracts have been stuck in a slight upward trending channel. Thereby causing no concerns for funds, who have made only small changes to their position since early June. Last week both contracts spent most of week challenging the upside, but with limited success as the 200-day moving average in WTI, last at $42.7/b, provided a line the market could not break.

The natural gas long across four Henry Hub deliverable futures and swap contracts rose by 12% to reach 293k lots, the highest since November 2018 and the seasonal highest level going back at least ten years. U.S. natural gas futures rose to an eight-month high last week on speculation, that a record heat across the western half of the country, will stock increased demand from utilities which would help reduce stockpiles towards their long-term average.

Energy

Metals: Two weeks of gold and silver selling became three last week when both metals suffered a long overdue correction, triggered by vaccine hopes, better-than-expected US data, a stronger dollar and not least rising real yields. This following a four-week surge where gold rallied by 15% and silver by 57%. The net longs dropped to an eight-week low after speculators cut the gold net-long by 13.5% to 150k lots and the silver by 27% to 23k lots.

The rising volatility in gold futures spreads and the dislocation to spot gold traded in London have been cited as reasons why funds have moved long exposure from COMEX gold futures (tracked in this report) into Exchange-traded funds instead. The continued reduction in net-longs, however are a potential cause for concern from a gold bullish perspective. With the brightest minds shunning both metals despite a catalogue of bullish drivers, it may be time to consider the risk of a prolonged period of consolidation/correction. At least in the short-term while economic data continues to improve, the dollar short looking stretched and the U.S. yield curve show signs of steepening.

We have not changed our long-term bullish view on gold and silver, but also have to accept that the trade, especially through non-leveraged ETF’s, has become very crowded, thereby raising the risk of increased two-way action.

We have not changing our long-term bullish view on gold and silver, but also have to accept that the trade, especially through non-leveraged ETF’s, has become very crowded, thereby raising the risk of increased two-way action.

The elevated HG copper long was reduced for a second week as the metal stopped rallying after finding resistance at $3/lb. The net-long was reduced from a two-year high, this time by 12% to 47.4k lots.

Precious and industrial metals

Agriculture: Weakness before the bullish received WASDE report last Wednesday saw funds cut their net-long in soybeans by 39% while returning to a net short position in wheat. The corn net-short was unchanged but remained the biggest short held by funds across the commodities we track. This before a strong end of week rally after a price friendly WASDE report, bigger than expected unplanted acreage and wind storm damage impacting the potential crop outlook.

Soft commodities were all bought with net long positions currently held in all four contracts. The increase, primarily due to short covering, occurred despite weaker price action during the week. Especially coffee which sank by 8% but still saw the net-long rise by 45% to 23.8k lots.

Key U.S. crop futures
Soft commodities
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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