It’s no secret that speculators are buying up long contracts of commodities futures. Speculators, in this case, refer to market participants who are not commercial producers or buyers of the commodities.
There are two major reasons that explain this increase. One, institutional funds, which used to only invest in stocks and bonds, are increasingly warming up to the idea of commodities. Two, traders and hedge funds are attracted by the upside potential of commodities.
Indeed, certain commodities have handily outperformed the general stock and bond markets in recent years. It is precisely this outperformance of commodities (or under-performance of stocks and bonds) that have attracted the attention of speculators.
However, the crowding of speculators in into one trade (in this case, long all kinds of commodities) usually spells an imminent reversal, especially if commercial users are on the other side of their trades. The logic used to be that speculators know less than commercial users, so they’re wrong more often than not.
Now, this thinking applies less because speculators are no longer only betting on commodity-specific trends, but also on macroeconomic prognoses.
Nevertheless, high participation from speculators is still potentially a bearish sign. One, it might mean the marginal speculative buyers are already in, so there is no one else left to buy. Two, nimble speculators (like hedge funds) can suddenly turn on a dime and dump their long positions.
Below is a sampling of commodities along with the percentage of trades held by speculators. The information is compiled from the latest Commitment of Traders report. Spread positions of speculators are excluded. (Data as of the end of last week).
% overall % long
CORN - CHICAGO BOARD OF TRADE
WHEAT - CHICAGO BOARD OF TRADE
OATS - CHICAGO BOARD OF TRADE
ROUGH RICE - CHICAGO BOARD OF TRADE
LEAN HOGS - CHICAGO MERCANTILE EXCHANGE
MILK, Class III - CHICAGO MERCANTILE EXCHANGE
CRUDE OIL, LIGHT SWEET - NEW YORK MERCANTILE EXCHANGE
NATURAL GAS - NEW YORK MERCANTILE EXCHANGE
SILVER - COMMODITY EXCHANGE INC.
GOLD - COMMODITY EXCHANGE INC.
COPPER-GRADE #1 - COMMODITY EXCHANGE INC.
RANDOM LENGTH LUMBER - CHICAGO MERCANTILE EXCHANGE
1) Speculators account for over half the overall contracts for several commodities.
2) For overall contracts, natural gas has the highest speculator participation at 83 percent. For long contracts, lean hogs ranks first with 94 percent.
3) Milk has the least amount of speculator participation, at 23 percent for overall contracts and 24 percent of long contracts. It is also the only commodity that has less than 50 percent speculator participation on the long side.
4) Natural gas and crude oil are also traded, in significant volume, on the IntercontinentalExchange (ICE) and other places. For example, in addition to the oil and natural gas instruments on the NYMEX, there is also “NATURAL GAS ICE HENRY HUB - ICE OTC” and “CRUDE OIL, LIGHT SWEET - ICE FUTURES EUROPE.” Therefore, the figure above for these two commodities should be taken with a grain of salt.
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