The commodity markets have been unkind to long only funds and indexes in 2014. Most of the commodity markets have been sideways to lower with a couple of exceptions like cocoa and cattle. This week, we’re focusing on the broader commodity landscape due to an article published on Bloomberg by Debarati Roy in which she stated that open interest in gold had slumped to a five year low. We’ve expanded on this topic to include 27 general commodity markets and compared their current open interest to where they stood both one month and one year ago respectively. The purpose is to determine whether smart money is headed into or, out of the commodity markets in general as well as what affect this may have on the markets going forward.
Since the poke that got this ball rolling was the gold article, we’ll start there. The gold market is up about 9% year to date and about even over the last month. The primary spark to this market was the Ukraine unrest in March, which spiked the market by about 4%. The important point is that commercial traders were sellers into the price spike and they have done a very good job of trading the gold futures market’s sideways movements as they’ve been strong sellers above $1,350 and strong buyers below $1,260. The best evidence of this is that the total commercial position has declined by more than 80,000 contracts since this time last year in spite of adding around 35,000 contracts in the last month. We’ve also seen this in silver, copper and platinum. These markets all have substantially lower participation rates than they did one year ago.
The first logical assumption follows that the risk premium is being taken out of the precious metals markets. I believe some of this is true but that wouldn’t account for the 20% decline in commercial traders’ copper position since last month. This also would not account for the year over year declines in both the 30-year Bond and the Eurodollar. One final note when approaching participation rates from the fear angle is that the Vix futures have also seen declines of 10% and 20% over the last month and year, respectively. Once I’d compiled my data and saw these preliminary results, my next thought was simply, “They’ve all just moved to cash.”
Turns out, I was wrong again. The U.S. Dollar Index has seen both monthly and year over year declines in the commercial trader participation rate. In fact over the last month, the British Pound and the Japanese Yen are the only currencies that have seen an uptick in commercial traders’ positions. Both of these markets have seen a jump of more than 20% in their net commercial positions. Interestingly, the British Pound is positive while the action in the Yen is turning negative. Meanwhile, the Euro FX has been the big winner. It has nearly doubled its commercial trader open interest in the last month and nearly quadrupled it over the last year. It is quite clear that whatever geopolitical events may happen, the commercial traders are pretty darn certain that it’s going to be a Euro friendly world going forward.
Furthermore, the risk premium we’re used to seeing given the current global political landscape in oil just isn’t there. Renewed tension in the Middle-East due to ISIS as well as the escalated conflict between Israel and Palestine should be causing some forward supply concerns and yet, oil is comfortably below $100 per barrel for light sweet West Texas Intermediate (WTI). Apparently oil refineries aren’t too worried about procuring future inputs. We’ve seen their interest decline by more than 25,000 contracts in the last month and more than170,000 contracts or 25% year over year.
Meanwhile, Ukraine unrest has driven some interest back into wheat and natural gas. Ukraine is the 9th largest wheat producing country and wheat has attracted significant commercial interest and shifted their outlook to bullish beginning in June. In fact, commercial traders have been net buyers in Chicago Board of Trade wheat futures in twelve out of the last thirteen weeks totaling nearly 90,000 contracts. Natural gas has also attracted the same type of commercial interest as they’ve been net buyers in sixteen out of the last seventeen weeks to the tune of 119,000 contracts. Putting these two figures within the context of their open interest of 585,000 in wheat and 80,000 in natural gas it becomes easier to see how important it is to track them as a larger and larger portion of the total open interest becomes controlled by a smaller number of well informed participants.
General interest in the commodity markets has subsided since the big boom and bust of 2008. Keeping track of the market’s players and their actions can help alert us to changing situations within the general ebb and flow of the market’s typical meanderings. Tracking the depth of the commercial traders’ commitments through measuring their current position sizes against the past tells us how anxious they are to get positions executed at current price levels. These positions also help to ascertain whether recent market action has the legs to continue or if the move is simply a fake out. The gold and silver rally in early July was a great example of not getting sucked in by a false breakout while the giant commercial build in cotton has been reason to look for bottoming action.
