COT: Gold and grains in demand

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. 

Commodities

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. 

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.

Agriculture:

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. 

Forex

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