Commodities
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 27. A week that saw global equity markets continue higher while other markets traded mixed with bond yields higher and the dollar lower ahead of Thursday’s long-awaited US PCE core deflator print, the Fed’s preferred inflation gauge. Commodities meanwhile found a bid with rising energy, industrial metals and softs prices offsetting some weakness in precious metals and grains. Also in this, we take a closer look at gold which closed at a record high on Friday.
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 Moneyand other
Financials: Dealer/Intermediary; Asset Manager/Institutional;Leveraged Fundsand other
Forex: A broad breakdown between commercial andnon-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 havetight stopsandno underlying exposurethat is being hedged
- This makes themmost reactive to changesin fundamental or technical price developments
- It provides views aboutmajor trendsbut also helps to decipher when areversalis looming
Do note thatthis 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 27. A week that saw global equity markets continue higher while other markets traded mixed with bond yields trading higher and the dollar lower ahead of Thursday’s long-awaited US PCE core deflator print, the Fed’s preferred inflation gauge. Commodities meanwhile found a bid with energy, industrial metals and softs offsetting some weakness in precious metals and grains.
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%), managed to reverse losses seen the previous week with broad energy gains, led by natural gas (+10%) and WTI (2.4%) and pockets of strength in wheat, softs and livestock offsetting weakness across precious metals.
On an individual level, hedge funds turned net buyers of WTI crude, natural gas, copper, corn, wheat and cotton, partly offset by net selling in Brent, silver, platinum, soybeans, cocoa and coffee.
What’s next after gold hits record closing high
In our latest commodity weekly, we highlighted gold’s resilience during February when the yellow metal ended up unchanged on the month despite the negative pull from a stronger dollar and rising bond yields, after rate cut expectations deflated with the first cut being delayed until June or later. Furthermore, so-called ‘paper’ gold investors in ETFs and futures have so far this year been net sellers of gold, in ETFs by around 100 tons while speculators in the futures market have halved their net long after selling around 190 tons. We also reiterated our patient stance regarding the timing of the next move higher towards and beyond the December 4 records at USD 2,135 in spot and USD 2,152 in COMEX futures.
Ahead of last Thursday’s long-awaited US PCE core deflator print, the Fed’s preferred inflation gauge, gold had behaved like a coiled spring, wanting to trade higher despite yield headwinds, but held back by worries about an inflation surprise. However, with the number in line with expectations, gold started a move that accelerated on Friday when the yellow metal reached the December 28 high at USD 2,088, before closing at a record USD 2,082.90. This after a weaker ISM manufacturing and the revision to University of Michigan sentiment numbers garnered a dovish reaction, sending yields and the dollar lower.
Overall, these developments point to a continued strong underlying physical demand from central banks and retail buyers in Asia. In addition, we believe that heightened geopolitical tensions around the world have reduced the short-selling appetite, basically all strengthening gold’s current buy-on-dips credentials.
Our short- to medium-term technical outlook for gold can be found here
