We track the Commitment of Traders report in four major domestic metals markets - gold, silver, platinum and copper. Currently, the commercial trader category is roughly bullish on the lot of them. Very rarely do we see all four metals markets telling us the same thing. While the markets may seem similar, their uses in both industry and investing provides each of the four with subtle nuances and slightly negative correlations that keep them from syncing up very often. Currently, the commercial long hedgers, the ones who take metal off the market for use in finished products or locked up in investments feel that the platinum market is a nearing bargain levels as it hasn't traded this low since 2009.
The platinum market has been slammed by the Chinese stock market's impact on forward industrial demand through automobiles and electronics. The expected consumer retrenchment has been accompanied by tremendous managed money selling in the platinum futures. Platinum is sold off as industrial in times of economic distress yet, becomes suddenly precious the second the global economy becomes inflationary. This dichotomy in the platinum market between the industrial and precious categories leads to wild volatility at this market's extremes. Therefore, it is important to know where we are in this cycle in order to take advantage of the coming whipsaw.
Given the current state of the global economy, platinum is being sold off as an industrial metal by the managed money complex. In fact, according to my data, managed money now controls nearly 60% of the total open interest! This is by far, the biggest imbalance I've found and herein lies the danger. Platinum is a fairly thin market. Executing more than 10 contracts (500oz.) per click can be difficult enough. Therefore, when this market starts to turn higher and managed money begins buying back their short contracts, it could snap back rather violently. Finally, while the speculators are setting record short positions, the recently bullish commercial traders have only fulfilled about half of their historical buying capacity.
We've plotted the last year's worth of commercial trader activity in the third pane of the chart below along with the discretionary COT signals. As you can see, they've been fairly patient and cautiously bullish with little change in their net position since the October buying spree. The longer term chart shows that this is the most bullish they've been since the October of 2008 lows near $770 per oz. Finally, notice that their current net position is short just over 20,000 contracts. Meanwhile, their record bullish position of net long 3,600 contracts shows just how much buying power the commercial traders still possess.
|The commercial traders have been exceptional in their timing of the platinum market over the last year.|
Commercial traders are the ones who produce a commodity or process it for final distribution. Each individual company on each side of the market focuses all of their attention on two final questions. Commercial short hedgers (miners) want to know if they should be selling their anticipated forward production at these prices while commercial long hedgers (processors) want to know if they should be stocking up on future inputs at these prices. Many of these companies on both sides of the fence have been around for generations while the managed money complex is a constantly changing group, thinned by attrition and fueled by aspirations of becoming the next Richard Dennis.
Our family has been in the physical and futures commodity business for three generations. We'll side with slow and steady supply and demand. Pick our shots accordingly, on the long side in this case, and wait for the key reversal to force the shorts into covering their positions thus pushing the platinum market back up to a neutral value area so the process can begin again.
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