COT: US Inflation surprise drives broad speculative selling of metals COT: US Inflation surprise drives broad speculative selling of metals COT: US Inflation surprise drives broad speculative selling of metals

COT: US Inflation surprise drives broad speculative selling of metals

Ole Hansen

Head of Commodity Strategy

Summary:  Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, February 13. A week that saw global equities take a breather while bond yields and the dollar spiked after hotter-than-expected US inflation data dealt a blow to Fed rate cut hopes. In commodities, the metal sector sold off on the back of this, thereby joining ongoing weakness across the grains sector, while renewed strength returned to energy with softs continuing higher. We take a closer look at gold and discuss the yellow metals ongoing ability to withstand heavy selling in ETFs and futures


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 main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's 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

Do note that this group 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.


 

This summary highlights futures positions and changes made by hedge funds across commodities and forex in the week to last Tuesday, February 13. A week that saw global equities take a breather while bond yields and the dollar spiked after hotter-than-expected US inflation data dealt a blow to Fed rate cut hopes, forcing the market to price a delay of the first as well as revising lower the number of subsequent cuts. In commodities, the metal sector sold off on the back of this, thereby joining ongoing weakness across the grains sector, while renewed strength returned to energy with softs continuing higher. 

Commodities:

The Bloomberg Commodity index, which tracks a basket of 24 major futures markets split between energy (30.1%), metals (34.2%) and agriculture (35.7%), lost 0.4% during the reporting period, primarily due to losses across the metals sector after the stronger than expected US inflation print raised doubts about the timing and depth of incoming US rate cuts. The grains sector continued to be challenged by ample supply and bulging global stocks, with the Bloomberg Grains index falling to a fresh three-year low.

Partly offsetting these developments, the softs sector continued higher, with tight supply supporting all four futures markets, not least cocoa, which continued its recent parabolic rise. Elsewhere, the energy market traded mixed with strong rallies across crude oil and fuel products being partly offset by a 16% natural gas slump. 

Gold’s resilience despite strong ETF and futures selling

The precious metal market, led by gold, started the year on a high note following a strong Q4-23 when the Fed focus finally turned from rate hikes to cuts. However, since then resilient economic data have driven down expectations for future rate cuts while delaying the timing of the first until mid-year. At the end of the latest reporting week to February 13, gold traded down only 3.4% on the year, a muted response to a +3% stronger dollar, a 44 bps rise in US 10-year Treasury yields and expectations for 2024 rate cuts almost reduced by 75 basis points. 

Investors in so-called ‘paper’ gold: being exchange-traded funds and money managers in futures have as expected responded to these challenges. Since late December total ETF holdings saw a 2.6 million ounce reduction to 82.9 million, a four-year low while money managers such as hedge funds and CTA’s, often responding to short-term technical developments, cut their futures net long by 8.9 million ounces or 6.6% to 4.64 million (46,400 futures contracts), a four-month low. 


The fact gold has ‘only’ lost the mentioned percentage despite the stronger dollar, a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan. Ahead of the Chinese New Year holiday last week, the
World Gold Council reported wholesale gold demand in China had seen its strongest January ever with 271 tons (9.6 million ounces) bought while the PBoC reported the 15th consecutive gold purchase in January, adding 10 tons to their gold reserves lifting the total to 2,245 tons. 

Heavy selling of metals and continued short selling across grains were only partly offset by renewed demand for crude oil adn fuel products as well as continued buying of softs
Energy: A fuel product-led rally saw crude oil rally by more than 5%, driving a 58.4k contracts jump in the combined net long to 392k contracts, some 20k below the Red Sea crisis peak from Feb 2. Gas oil led the charge with a 22% increase to 81.4k while a 16% natural gas slump lifted the net short to a four-year high.
Metals: Broad selling set up the end of week rally with gold length cut 44% to a 4-month low, silver and copper net shorts both doubled while the palladium short reached a fresh record high.
Grains: Continued but slowing selling of soybeans and corn drove the sector short to 604k contracts, some 103k less than the May 2019 record high
Softs: The cocoa net long was cut by 21% after traders began booking profit following a near 50% in less than five weeks. The cotton long jumped 54% to a 21-month high while the coffee long reached a two-year high.
In forex, the speculative flows continued to favor the dollar which returned to a net long for the first time since November, as aggressive short selling of JPY and a further reduction in the EUR long was only partly offset by demand for GBP and MXN.

Commodity articles:

2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: 
Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: 
Grains up on short covering; softs supported by tight supply
24 Jan 2024: 
 Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: 
Silver and copper in focus after recent declines
19 Jan 2024: 
Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: 
Natural gas focus switch from cold to milder weather ahead
16 Jan 2024:
 Data dependent precious metals continue their bumpy ride
12 Jan 2024: 
Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: 
Q1 Outlook – Year of the metals
5 Jan 2024: 
Commodity weekly: Bumpy start to 2024
4 Jan 2024: 
What to watch in crude oil as 2024 gets underway
4 Jan 2024: 
Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: 
Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: 
Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: 
Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: 
Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: 
Video - Investing in Uranium
1 Dec 2023: 
Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: 
Precious metals take top spot for a second month
23 Nov 2023: 
A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: 
Will Santa deliver another golden gift
22 Nov 2023: 
Will gold and silver see another Santa rally?
17 Nov 2023: 
Commodity weekly: Crude overshoots; silver the comeback kid


Previous "Commitment of Traders" articles

29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: 
COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: 
COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024
COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: 
COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: 
COT: Speculators add further fuel to gold rally
20 Nov 2023: 
COT: Crude selling slows, grains in demand
14 Nov 2023: 
COT: Crude long slumps; agriculture sector in demand

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