Hedge funds hate commodities right now. And traders are setting up for record “short” positions in several commodities.
A short is when a trader borrows a share or contract and sells it with the promise to return it later. The trader hopes that it will fall in value so that they can buy it back later for cheaper. They then return it and pocket the difference as profit.
If the price goes higher, they are forced to buy it back at a higher price and eat the loss.
Traders are short commodities right now. There are near-record short positions in platinum, gold, copper, soy and coffee.
There is a lot of borrowing and selling going on with the expectation that prices will continue to fall.
There is a good reason to be bearish for each commodity.
Platinum is mainly used for diesel cars, which are falling out of favor.
Gold prices fell as the U.S. dollar strengthened. Take a look at this chart of the net position in gold. Managed money is at a five-year low.
Record Gold Shorts
American soy prices got pummeled from China slapping a 25% tariff on imports. The chart below shows that traders are getting close to recent record short positions.
Managed Money Is Short Soy
And the threat of a global economic slowdown saw a sell-off in copper.
Short Positions in Copper
Each of these are a reason to be cautious — some more so than others. And funds, or “managed money” as they are reported, are making record bearish bets.
That may sound like a reason to exit these markets. But for contrarian investors, it is a firm buy signal.
Now that the short positions are just about maxed out, traders must buy back these contracts. This creates a cascade of buying, which drives the price up.
When shorts are as piled up as they are now, it can create a stampede to get out. That’s great for commodity bulls.
The pop in prices from managed money closing out their short positions will be short-lived.
Look to capture the run-up over the next few months before the longer-term trends in each commodity take over again.
The iShares S&P GSCI Commodity-Indexed Trust ETF (NYSE: GSG) is a great way to capture the overall trend in commodities.
Good investing,
Anthony Planas
Internal Analyst, Banyan Hill Publishing