Re-shuffling the Metal Markets

Last week’s unemployment report did a number on the metals markets. This week, we’ll look at two key points – open interest and commercial trader’s share of open interest – to determine what’s going on in the metal markets and what actions the smart traders are taking at this stage of the game.

Last week, we focused on the negative issues hitting the copper market, including the record commercial trading position that appears to be failing. This is of major importance because the commercial traders’ sudden shift towards a negative bias in an industrial raw material bodes poorly for their collective global economic forecast. We discussed this in great detail last week on our own blog, “Copper Traders Bailing out of Record Position.” Commercial traders in copper have sold more than 20,000 contracts in the past four weeks. Their current position makes up 18% of the market’s total open interest. Finally, copper futures’ increasing open interest over last week’s decline suggests that this market has further to fall.

Moving to the precious metals, we’ll start with some general comments. First of all, commercial traders have been buying the precious metals and selling the base metals. They’ve been net purchasers of silver and platinum for five straight weeks and in the gold market for the last four straight weeks. This is a clear defensive stance towards declining global economic growth and projected inflation.

Interestingly, their purchases in gold have been more concerted than in silver and platinum, respectively. Commercial traders have added more than 76,000 contracts to increase their share of the gold market to more than 30%. This is their most concentrated position since last August. Furthermore, open interest declined precipitously on Friday’s fall. Based on the historical interaction between trader groups, my guess would be that plenty of bottom picking small speculators got washed out Friday. Therefore, the market will probably trade lower to make one more new low before it holds.

Platinum has also seen an open interest decline as that market had tried to hold the recent low before failing with the rest of the metals markets on Friday. The platinum market is tricky due to its small size. Commercial traders have added more than 10,000 contracts over the last five weeks. Commercial buying combined with a small speculator washout has increased the commercial trader position in this market to about 17%. It is very likely that the platinum lows are nearly in as a market that had been trending lower is now seeing declining open interest on its move back to the lows indicating a lack of new sellers at these depressed prices.

Finally, the silver market is the one that has me most flummoxed. Commercial traders have been buyers in each of the last five weeks, now controlling nearly 20% of the market’s open interest. Interestingly, open interest has increased on silver’s move lower, including Friday’s action. My gut feeling is the additional buying that has propped up open interest has been the commercial traders. Unfortunately, due to the reporting periods, we won’t know for sure what happened Friday until we see the next report. Check back for a follow-up.

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