COT: Gold and silver length cut in half; Agriculture bought on weather woes
Head of Commodity Strategy
Summary: Futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, August 10. A week that saw speculators getting busy adjusting positions in response to an increased virus threat at a time of rising yields and dollar following the strong US jobs report for July. In commodities speculators continued to rotate out of energy, industrial and investment metals, and into the agriculture sector.
The summary below highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, August 10. A week where hawkish comments from Clarida, the Fed vice-chair and strong jobs report saw markets starting to price in an earlier than expected unwinding of the Fed’s massive stimulus program.
These developments helped trigger a one percent increase in the Bloomberg Dollar index while ten-year inflation protected yields jumped 16 basis points just after hitting a record low. Stocks saw another growth to value rotation while commodities traded mixed with heavy selling in precious metals being partly offset by continued buying across the agriculture sector. Energy and industrial metals also suffering setbacks on demand concerns in response the continued spreading of the delta coronavirus variant.
The Bloomberg Spot index lost 1% during the reporting week to August 10, as the continued spreading of the delta coronavirus variant in Asia and parts of the US raised concerns about demand for key commodities such as crude oil and copper. Investment metals slumped on rising yields and dollar while the agriculture sector remained to the go to sector with adverse weather across the world providing a boost to both grains and softs.
Overall, the total net long across 24 major commodity futures was cut by 4% to 2.2 million lots with selling of crude oil, gas oil, gold, silver, and copper being only partly offset by demand for sugar, soybeans, corn, and wheat
Energy: Continued crude oil weakness saw speculators cut their net length in WTI and Brent for a second week to an eight-month low. This in response to demand worries caused by the rapid spreading of the delta coronavirus variant, not least in China were a relatively small number of cases has led to renewed shutdowns and restrictions on movements. The combined long was cut by 48k lots to 566k, but just like the previous week reduction, the change was solely driven by long liquidation with no signs of appetite for naked short selling. Probably due to the belief the disruption will be transitory and that OPEC and friends, if necessary, will adjust production to support the price.
Monday morning comment: Crude oil trade lower for a third day with Brent back below $70after key oil consumer China released weaker than expected retail sales and industrial production data and following Friday’s very weak sentiment reading. These developments support IEA’s latest downgrade to demand for the months ahead as a resurgent delta coronavirus variant is impactingdemand across the world. Also, in the US there are signs shale producers are ramping up activities with the number after the number of rigs last week rose by 10 to 397, marking the biggest jump since April.
Metals: Speculators more than halved their gold and silver longs during a very troubling week for precious metals. The week covered a renewed rise in bond yields following Fed vice-chair Clarida’s hawkish comments and the strong jobs report culminating in last Monday’s flash crash. In response to these for metals adverse developments, the gold net length was cut by 52% to 51k lots while the silver length collapsed by 54% to just 12k lots, a fifteen months low.
Platinum, which during the week saw its discount to gold rise to $800 from an April low at $500 saw continued selling with the recently established net short more than doubling to a 13-month high at 9k. Rangebound copper was sold for a second week with the net long dropping 19% to 32k lots, thereby reversing half the buying seen since the June low at 19k lots.
Monday morning comment: Gold finished last week on a firmer footing after a much weaker than expected University of Michigan sentiment (see below) helped deflate some of the buildup taper angst with Treasury yields and the dollar traded lower ahead of the weekend. Both paused their retreat overnight with gold and silver drifting lower as a result. A major band of resistance has emerged between $1790 and $1815 while support needs to hold around the $1750 area. Following last Monday’s flash crash, speculators slashed their gold and silver net longs by more than 50% leaving the market exposed to fresh buying on a break higher. This week the market will be watching a speech by Fed chair Powell, as well as minutes of the Fed’s last meeting.
Agriculture: Continued price gains across the agriculture sector helped drive another week of speculative buying in both grains and softs. Adding to the support was the grain market gearing up for an expected price supportive monthly supply and demand report from the US Department of Agriculture last Thursday. A report that turned out to justify the recent buying, not least in wheat which surged higher on weather related production reductions in the US, Canada and Russia.
The world is potentially facing a supply issue with high protein milling wheat used for human consumption in bread, and that explains why Paris Milling wheat and Kansas HRW wheat both trade higher by more than 10% this month. Overall, the net length in Chicago and Kansas wheat was increased by 10k lots to 64k, still substantially below the interest seen in corn (254k) an soybeans complex (180k)
Sugar is another highflyer due to lower supplies from frost and drought hit regions in Brazil, and news India, the world’s second largest shipper is considering diverting canes towards the production of biofuel to curb imports of increasingly expensive crude oil. The net length in raw sugar futures rose 7% to a five-year high at 265k lots. The cotton long reached a three-year high at 73k lots while the coffee long suffered a setback after the price retraced from a multi-year high above $2/lb.
Speculators increased bullish dollar bets in response to the early August strong jobs report and hawkish Clarida comments. The reporting week ended last Tuesday when several currencies was under pressure from a strong greenback, not least the euro which was challenging key support at €1.17. In response to these developments, the net dollar long against ten IMM currency futures and the Dollar index jumped one-third to a fresh 17-month peak at $4.8 billion.
Selling was broad, but mostly concentrated in euros, Japanese yen and Aussie dollar while short covering helped flip the Sterling position back to a net long.
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 reasons why we focus primarily on the behavior of the highlighted groups 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
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.