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Metal positioning points to risk of short squeeze
Commodities
Ole Hansen
Head of Commodity Strategy
Summary: Precious metals as well as platinum and palladium trade higher despite Friday’s Jackson Hole remarks from Jerome Powell, the Fed chair, which on balance was seen to be hawkish as they signalled a further delay to the timing of the first rate cut. After initially dipping on the news, the mentioned metals soon recovered thereby preventing a change in the recent positive sentiment, that so far has been led by silver, and supported by copper strength in anticipation of additional economic support from the Chinese government. In this we take a look at the potential impact of short covering from leveraged funds who for weeks have been net sellers
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Global Market Quick Take: Europe
Commitment of Traders: Broad commodity selling led by crude oil and gold; T-bond short hit fresh record
Precious metals trade higher despite Friday’s Jackson Hole remarks from Jerome Powell, the Fed chair, which on balance was seen to be hawkish as they signalled a further delay to the timing of the first rate cut. In the keynote speech, Powell stuck with the central bank’s long-term inflation target of 2% and it led him to say that the Fed was still a long way away from achieving that goal.
While the market concluded these meant rates would stay higher for longer, Powell did however also add the Fed will continue to focus on incoming data and take a careful, measured approach to further policy tightening. After initially dipping on the news, precious metals soon recovered thereby preventing a change in the recent positive sentiment, that so far has been led by silver, and supported by copper strength in anticipation of additional economic support from the Chinese government.
With precious metals, and platinum group metals showing signs of stabilizing following weeks of weakness, the attention has turned to speculators and the positions they hold across the different metal futures. Surging bond yields and a recovering dollar has for the past couple of months been the main drivers behind the weakness across the investment metal sector, and the negative momentum seen during this time has attracted selling interest from hedge funds and other leveraged traders in the futures market.
Do note that this group of traders 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.
Data from the most recent Commitment of Traders report, covering the week to August 22 showed some emerging buying interest, especially in contracts where short positions were or had been held. The continued strength seen in the days that followed could indicate reduced belief in lower prices, and while it may add a bid to the market from the reduction of short positions, more work needs to be done for sentiment to turn positive.
Below we take a closer look at technical price developments with support from Kim Cramer, Saxo's Technical Analyst Expert.