The investors who helped bid up the price of LME copper to a four-year high of $7,348 a metric ton last month are beating a path to the door. Holdings of investment funds in Chicago copper futures this month crashed to a net short position for the first time since the election of U.S. President Donald Trump in 2016, having hit a record net long of 125,376 contracts as recently as September.
Other hard commodities are showing similar weakness. In gold – whose characteristics are seen as so different to copper that the two are often played off against each other – the position of investment funds also slipped into net short territory last week, reversing a two-and-a-half year bull run. Platinum, which has been struggling for much of this year, hit its deepest net short in data going back to 2009.
It’s another picture entirely in softer products. Investment fund positioning in soybean meal, cocoa and cotton has been hovering close to multi-year highs, despite suffering some slight reversals in recent months. Soft red winter wheat – a perennially unloved crop for money managers – is also enjoying a rare spell outside of net-short territory.
Meanwhile in petroleum, positioning in Nymex WTI crude and RBOB gasoline contracts are only a sliver below the record highs hit earlier this year. Brent crude, gasoil and natural gas have suffered more dramatic falls in investor sentiment alongside the metals over the past two months, but still remain at net length that would have been inconceivable until a few years ago.
It’s not a universal pattern. Fuel oil – a heavier fraction from oil refineries that’s in trouble because of the impending clean-up of shipping emissions we wrote about last week – has flipped into sharply negative territory this year. Net shorts in soybeans and soybean oil offset the long position in soybean meal, though the total processing margins generated by the three U.S. soybean contracts are still at elevated levels.
It would be a mistake to regard this suite of data as evidence for one overarching dynamic. It does, however, help rule out some unified theories. The recent declines in petroleum and agriculture positions are evidence that the strength of the U.S. currency is indeed starting to erode the prices of dollar-denominated products, but the bullish positioning in many commodities indicates that foreign-exchange movements aren’t the whole story.
The same is true of one longstanding explanation for gold’s swings – that it weakens whenever U.S. interest rates rise because it doesn’t yield an income the way stocks and bonds do. If that was the underlying reason for what’s going on now, you’d expect it to be affecting much more of the yield-free commodity space than we’re seeing.
In truth, the explanations for the bearishness are mostly specific. Platinum has been suffering, as we wrote in January, because the diesel cars whose catalytic converters account for about a third of demand are going out of fashion. Gold is being undermined by both the greenback and the sentiment of investors and Indian jewelry buyers – two key swing groups who’ve traditionally bought into periods of weakness, but appear to be standing aside on this occasion.
And for all that its recent weakness has been put down to fears of a U.S. trade war hitting Chinese exports of appliances and electronics, copper is most vulnerable to another factor: The risk that Beijing’s deleveraging plans hit the construction and engineering demand that has underpinned consumption for the past decade. Outside of China’s building sector, the world still consumes about the same 14 million metric tons of metal a year that it did back in 2005.
There’s an opportunity wrapped inside this crisis for metals. A trans-Pacific currency war or Chinese push to reflate the economy through industrial stimulus should be bullish for, respectively, gold and copper, but the world’s hedge funds are betting on the opposite outcome. As we saw with spot gold’s 0.5 percent gain on Friday, nervousness is creeping into the bearish trend for these commodities.
That’s justified. Any reversal of the current dynamic is going to leave money managers short in a rising market. There are few worse places to be.