Hedge funds and large investors have cut their long exposure in US commodities to the lowest level since March 2009. This was the time when the markets were slowly beginning to recover following the Lehman crisis. As of last Tuesday futures and options positions were cut by 12 percent to 656,000 contracts, a nominal reduction of 9 billion dollars to 60 billion dollars.
The reductions happened just ahead of the biggest rally in raw materials in two months after better than expected US data caused a pre Christmas rally in stocks and commodities. The S&P GSCI commodity index rallied 4.5 percent, erasing this year’s declines and pushed the index toward its third consecutive annual gain.
All sectors apart from grains saw reductions of between 13 and 15 percent with positions held in 7 of the 24 commodities we track being outright short.
Gold long positions were reduced to April 2009 levels at which time gold was trading at just 900 dollars per ounce. Silver fared even worse, seing a one third reduction to levels last seen during late 2008 when the price of silver was less than 10 dollars.
Investors in WTI crude oil meanwhile continues to hold onto long positions with oil longs now accounting for 31 percent of the total nominel exposure that hedge funds are holding among the 24 US commodities that we track.
With January fast approaching many investors are very cautious with regards to the performance of commodities during the early stages of 2012. The sharp reduction in speculative involvement however should be watched very closely as any renewed build in long positions could have a significant impact on prices.
Seasonally over the last ten years the S&P GSCI index have shown a negative January return in 7 out of 10 years followed by a flat performance in February only to rally sharply in March. Whether history will repeat itself remains to be seen but we are cautious about getting too negative on the sector given the current reduced involvement by hedge funds.
Ole Hansen
SAXO BANK