Hedge Funds Swinging with Commodities

The recent sharp movements in major commodities have had a cumbersome effect on the markets. Gold suffered the largest fall in 30 years and investors and traders are standing by to see what the next move might be.

In the latest CFTC Commitment of Traders Report (April 26) figures for both Gold and Oil suffered on the back of bearish sentiment among institutional investors. Investors reduced their net long positions to 46,168 contracts, the lowest amount since mid-March. Money managers cut 5,427 gross longs and added 9,984 gross shorts, overall bear position.

A similar scenario for the benchmark oil contract, institutional investors holding of net long positions in WTI declined, and the report showed a fall of 624 futures and options which totals 182,408.

“The CFTC traders report for April now shows another consecutive month of fund managers and traders reducing their long positions across all commodities. This further emphasises the fact that since Feb 2013 speculators are slashing their bullish bets that the commodities run is set to keep going. With so much uncertainty around economic recovery and supply demand uncertainty on commodities it makes sense for traders to look to gain alpha from other asset classes rather to take positions at this point”, said Amit Mehta, Strategic Consultant.

Faisal Anwar, Co-CEO of Mathamax Markets a research consultancy in Lahore witnessed a spur of selling among traders, he says, “with the outbreak in Gold we saw over 30% of clients come out of positions, if the yellow metal is range bound near the $1450 mark then we expect our clients to take short positions.”

Oanda publishes its clients open order book, nearly 1.4% of traders have open short positions at $1450 in Gold.

Amit continues, “With the S&P Goldman Sachs index trading down -2.57% and the Dow Jones UBS commodity index trading down -3.37% since the beginning of the year when compared to the S&P 500 equity index trading up +11.73 including dividends. It continues to confirm that bar a couple of situations equities have continued to outperform commodities and further emphasises that trading commodities is very much about market timing and the skill of picking the entry and exit of the position.”

Asian Impact

The short-term collapse in the price of Gold has given the consumer market a green light to go on a 'Gold' shopping spree. In India, the largest consumer market for Gold, retailers rushed to purchase gold as the price reduced significantly. Indians usually purchase gold during wedding season or for religious festivals. Zaveri Bazaar (jewellery market), in Mumbai is the largest hub for physical gold buying.

Gold futures prices on India's most liquid commodities Exchange the Multi Commodity Exchange dropped to a 15-month low of Rs 25,270 per 10 grams on the 16th of April 2013, this was in line with the harsh drop in the international markets, where the yellow metal witnessed its biggest one-day drop since the 198o's.

“Volumes were up 20% as most of the jewellers saw an increase in sales” sad Piyush Parekh CEO of VIBHS a Dubai based broker whose clients include several jewellers from Mumbai.

Piyush adds, “The same sort of panic buying was seen in the Gold Souk in Dubai."

Dubai's premier commodities bourse has benefited form the Volatility in precious metals, The Exchange set a new overall daily volumes record of 103,126 contracts on Tuesday, 16 April, 2013. The new record represents DGCX’s highest ever overall daily trading value of $3.8 billion.

Bright Future

Commodities are typically a safe haven for investors in times of economic gloom and are a hedge against inflation, precious metals have been in the driving seat since the global recession in 2008, however with the global economy seeing positive signs in the equity markets commodities are likely to retrace back to their far value.

However, Alex Krainer, a portfolio manager of the AITF fund at Altana Wealth believes the rally in commodities still has some fruit, “Commodity prices might be headed higher despite the fact that we are headed for a global economic recession. Past ten years' rise in commodity prices has fully reversed a century of steady declines. Keep in mind that the last century saw a 3-fold increase in world population and a 20-fold expansion of the world economy. Economic growth can only account for a part of the dramatic reversal in commodity prices – the other part has to do with the erosion of purchasing power of the US Dollar as well as other major currencies. This erosion is likely to continue taking commodity prices considerably higher over the coming years."