CA - CFTC Data Shows The Largest Speculative Palladium Short On Record

2023-03-09 15:57:42 ET

Summary

• Latest CFTC Data shows the largest net speculative short position on record.
• Current data is a month behind, and we expect it to be even larger.
• Every Speculative short peak has resulted in a low in the Palladium price, so any change in sentiment, we would expect the same.
• Opportunity for investors to take contrarian long positions and be patient as a number of catalysts could reverse sentiment.

Palladium Shorts Build to the Highest on CFTC Record

Previously we had discussed what we believe is a large opportunity for investors to take advantage of a rebound in the Palladium price. We will not go over those reasons here as the previous article mentioned it, but we do note that US automotive imports in January, were the highest on record according to the recently issued US International Trade Data . But the opportunity we wanted to highlight for investors is the massive speculative short position that has been building in Palladium

Before we get into the report and investment case in detail, here's a quick summary of the COT report

About the COT Report - The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.

Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.

There are many ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the experts on it. What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.

One thing to note is that about a month ago ION Trading (a major derivatives firm) was a hit by a massive and successful cyber-attack, which caused significant data delays that have affected the COT report. The result is that we are about a few weeks behind on the COT reports and our latest report is for February 14th. Some speculate that the delay in the reports has created a opacity in the markets that could potentially allow large positions to build without showing the wider markets. While we don't necessarily agree with that, it is something to note and certainly possible.

Huge Palladium Short Build

So this is hot off the press data (released 3/8) and the one thing we can say is … WOW!

In the latest report (one week period from Tuesday 2/7 to Tuesday 2/14), the palladium price fell from $1574 to $1418 (around -10%) and as we see it wasn't due to lack of interest, but rather, likely due to a massive build in short positions.

In fact, if we look at the complete history of the COT report, we see that the current Net Speculative position is the MOST BEARISH in the report's history.

We haven't seen a speculative net short position this bearish since this report started being published in 2007.

In fact, as the chart below shows, as we analyze the correlation between the palladium price and speculative short positioning we see that every speculative short high has corresponded to the low in the palladium price.

Of course, this makes sense as the palladium market is very small, so speculative positioning either way can push this thinly traded market. And of course, when a short cover starts, it will force buying as existing longs are simply not enough to satisfy a short cover - especially in the extreme we see today where over 6,000 contracts are speculative shorts or 50% of total Open Interest!

There was an interesting tidbit from the recent Impala ( IMPUY ) earnings conference , where Impala's Emma Townshend mentions (around the 54 minute mark) that she had a discussion with a big trading floor broker about volumes and asked him, "Is it fair to say that volumes are thin?" and their comment was "Paper Thin".

Paper thin markets plus a large short position offers patient investors (yes it may drop more) an opportunity to build a position with plenty of upside fuel as shorts potentially cover. All it would take is a producer announcing a drop in production (think South African power issues OR issues with Russian production) to throw sentiment the other direction.

Conclusion

We feel the short-term opportunity in Palladium is stronger than ever before as a massive short position exists and it seems that demand - the worry for the longs - hasn't dropped like a stone and that is supported by the strongest historical US Auto imports in January.

In fact, any one of the factors that we mentioned in our previous article, (South African production issues, a Russian response to US Aluminum sanction, etc) could cause a massive short squeeze regardless of the overlying bearishness of equity markets due to the Fed's hawkishness.

While we have the US Jobs report this Friday which poses a potential bearish catalyst, we would take any weakness in the price to build up a long position in palladium and platinum.

For investors who want to take advantage of this and invest in PGMs, there aren't that many options. Investors could look at platinum miners like Sibanye Stillwater, Impala Platinum, and Platinum Group Metals ( PLG ), but there is operational risk at work here and if we see issues in South Africa or with rising production costs, a higher platinum price may not outweigh those risks. Our preferred option is to invest directly in the metals by buying Aberdeen Standard Physical Platinum ETF (NYSEARCA: PPLT ), Palladium Trust, or the Sprott Physical Platinum & Palladium Trust ( SPPP ) which are physical ownership of platinum/palladium ounces. That way investors avoid operational risk and can directly benefit from a rise in the palladium and platinum price.

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