Commodities running on empty?

Published : May 17th, 2011

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Category : Market Analysis

A growing number of market participants think that the commodities bull market is running out of steam. These estimates are based partially on the recent developments in futures and options markets, where many hedge funds have recently been liquidating their long positions. But Chuck Jeannes, CEO of the world’s fifth-largest gold producer, Goldcorp, argued at the weekend that the upward trend in the precious metals sector still has a long way to go.

Data from the Commodity Futures Trading Commission (CFTC) show that major investors trimmed their net-long commodities positions in the week ending May 10, with hedge funds and speculators among the largest sellers. According to Reuters, professional money management funds dumped about 222,000 long contracts in 22 US Futures markets within only five trading days. Net long positions declined by 13% compared with the previous week. Many investors were caught on the hop by sudden and unexpected margin hikes on futures contracts, something that hit the silver sector especially hard.

The number of outstanding Comex long contracts in the gold sector has declined by almost 20,000 in comparison with the previous reporting period. This corresponds to a setback of 10%, or a nominal decline amounting to $3 billion. The situation is even worse in the silver sector, where investors cut their net-long positions by about 25%, which led to a nominal decline of $1.1billion. The total number of positions held by global funds decreased to $116.8 billion. However, the total number of outstanding long contracts is still at very high levels, and precious metals did manage to stage a partial recovery last week.

Famous investor Jim Rogers for one remains unconcerned by the correction, and stated in an interview last week that commodities will continue to appreciate over the coming years. In his view volatility will remain high, but the fundamentals underpinning this bull market remain intact. Continuing dovish policies by the world’s central banks – and in particular, the US Federal Reserve – are a particularly important fundamental factor. As the renowned fund manager Eric Sprott pointed out at a conference in Las Vegas last week, the markets have once again chosen gold as the world’s reserve currency.

Goldcorp’s Chuck Jeannes argues that the supply and demand dynamic remains bullish as far as precious metals are concerned. He notes that while mining production in the gold sector has steadily declined over the last ten years, demand for the metal has dramatically risen. In contrast to the recent announcement from Goldman Sachs, which called on gold producers to start hedging against potential price set backs, Jeannes said that Goldcorp was not planning on following Goldman´s advice.