London 26/09/2016 - The net long fund position (NLFP) in platinum dropped for the sixth week in a row, the latest CFTC statistics showed. As of September 20, it stood at 38,302 contracts, down 2,753 contracts or seven percent from the previous week. Open interest edged down to 74,671 contracts from 76,199 contracts while platinum prices were broadly unchanged. Falling open interest and unchanged prices do not offer a clear signal.
The fall in the NLFP was driven by long liquidation of 1,958 contracts and short accumulation of 795 contracts.
The gross long position (black line) has fallen since peaking early in August. The magnitude of long liquidation leads us to believe that a negative swing in sentiment has emerged. If so, the downside potential is significant considering that the gross long leg remains 120 percent higher than at the start of the year.
The gross short position (red line) has started to push higher after falling sharply for most of the year. Because it remains at a very low level, we would not be surprised by a faster pace of short accumulation once the downtrend becomes clear and market participants join the sell-off in increasing numbers.
Looking ahead, we expect the NLFP to fall further in the coming weeks because non-commercials were too aggressively bullish in the preceding months, pushing platinum ahead of its promising fundamentals. Still, possible production disruptions remain a key upside risk in case of strikes, affecting platinum's spec sentiment.
The NLFP in palladium fell for a sixth straight week to 12,520 contracts as of September 20, down 347 contracts or three percent on the previous week. Open interest edged up to 24,674 contracts from 24,477 contracts; palladium prices rallied nearly five percent over the reporting period. The rise in open interest is too weak to be viewed as a bullish signal.
The deterioration in spec positioning was driven by short accumulation of 431 contracts that was partly offset by a pick-up of 84 long contracts.
Longs (black line) rose for the first time in six weeks. Still, the pace of long accumulation remains too modest to suggest the start of a new trend. Shorts (red line) tentatively built new positions amid rising prices. There is a risk that shorts will build up fresh positions at a stronger pace, which would be reflected in rising open interest. This would be a bearish signal.
Similarly to platinum, the fall in NLFP in palladium suggests that speculators had already discounted stronger fundamentals caused by possible production disruptions in case of strikes in South Africa.
Looking ahead, the NLFP could continue to fall in coming weeks not because of the macro (which is currently friendly for commodities thanks the patient Fed) but because non-commercials had become excessively bullish amid expectations of supply tightness in South Africa. We do not see yet a negative swing in sentiment.
(Editing by Mark Shaw)