COT: US Inflation surprise drives broad speculative selling of metals

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.