COT: Gold and grains in demand COT: Gold and grains in demand COT: Gold and grains in demand

COT: Gold and grains in demand

Ole Hansen

Head of Commodity Strategy

Summary:  Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, January 3. A week that saw bullish dollar bets being reduced while money managers added exposure to gold and grains while China's changed virus approach, recession risks and warm weather saw net selling of WTI, natural gas and copper

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities while in forex we use the broader measure called non-commercial.
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 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


Financial Markets Daily Quick Take
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This summary highlights futures positions and changes made by hedge funds across commodities and forex during the week to last Tuesday, January 3. A week that given the timing saw limited activity across markets. Stocks were mixed, the dollar a tad stronger while bond yields softened after the IMF began the new year by warning a third of the world would be in a recession this year. This warning together with China’s messy and abrupt change from lockdowns to removing all restrictions helped send commodities sharply lower, led by energy while the metals, both precious and industrials received a boost. 


The energy sector began 2023 on the defensive, thereby driving the Bloomberg Commodity Index to a 2.7% loss in the reporting week to January 3. Recession worries and mild winter weather reducing demand for natural gas and fuel products helped send the energy sector sharply lower. The abrupt change from the Chinese government on several key policies received a mixed reaction across industrial metals with a short-term challenging demand outlook being offset by the prospect for a recovery gathering pace in the coming months. 


Hedge funds, responded to these developments by adding exposure to grains, especially soybeans and corn while reducing length in energy, especially WTI and natural gas. The metal space was mixed with gold length rising to a seven-month high while copper length was almost cut in half. 


A challenging start to the new year being driven by China, recession and warm weather demand worries saw natural gas tank by more than 22% while crude oil traded softer by around 3%. The response to these price changes were a 23% increase in the natural gas short while crude oil was mixed with WTI seeing a 30k lots reduction to 165k driven by a combination of longs being reduced and especially fresh short selling. Brent crude oil meanwhile saw buying extend to a third week as funds continued to buy into price weakness, a sign that funds sees limited downside below $80 at this stage. 

Market comment from today’s quick take: The first week of 2023 was tough for crude oil, driven by global growth concerns, a very mild winter across the Northern Hemisphere dampening demand, and a mixed outlook for China. Despite removing most virus-related restrictions, a surge in cases across the country has hit the short-term demand outlook while at the same time setting the economy on a path to recovery. Meanwhile, the IMF warned that a third of the global economy could be in recession in 2023. Supply side concerns are also seen with European sanctions on Russian oil having kicked in, while OPEC has reiterated that it is willing to step in with further production cuts. Short-term resistance being the 21-day moving at $75.65 in WTI and $81.15 in Brent.


Demand for gold, which started to recover after the yellow metal made a triple bottom around $1620 back in November, extended into the new year with funds raising their net long by 8% to 7.8k lots, a seven-month high. Supported by momentum and the outlook for a friendlier 2023 for investment metals gold has been the star performer during the first week of trading. While many wise traders over the years have refrained from getting involved during the first few weeks of a new year, the continued rally has increasingly forced technical focused traders to get involved. Further upside momentum will need support from central banks purchases and renewed demand from long term investors through ETFs. Both of which are playing out after China’s PBoC added 62 tons during November and December while ETFs last week saw its first back to back week of buying since last April. 

Copper jumped to a six-month high in Asia on Monday, driven by a general rebound in base metals as China looked to support an economic rebound. In addition, the under siege property sector has also received fresh support after the government showed signs of abandoning its “three red lines” policy that contributed to the downturn in recent years. Copper has advanced since November after lockdown protests led to an abrupt following months of fruitless lockdowns.

The change in direction set by the government has bolstered the outlook for demand beyond the first quarter thereby supporting the latest run higher. Friday’s break above the 200-day moving average towards key resistance in the $4 per pound area is likely to have been driven by hedge funds caught off guard by rapid changing outlook for China. In the week to January 3 they almost cut in half their High grade copper net long to 8.3k lots, in line with the five-year average but some 90% below the late 2020 peak.


Funds bought grains for a second week with the combine net long across the six futures contracts tracked in this rising to 494k lots, an eight-week high. Despite the normally quiet time of year, funds nevertheless bought 83k lots of corn in the two weeks ending last Tuesday, the most in any two weeks since November 2021. Elsewhere the soybean net long jumped to 143k lots, the largest since June while the wheat short remained elevated despite seeing a 6% reduction. Softs were sold in response to price weakness across all four contracts, the exception being coffee, after funds reduced their net short. 


After accumulating the biggest dollar short since July 2021, short sellers started the year on the defensive as the dollar showed signs of early strength against most of the major currencies, expect for the Japanese yen. The result being a 43% reduction in the gross dollar short against nine IMM futures and the Dollar index. The main flows as per the table below were selling of EUR, GBP and JPY being partly offset


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