Here Are Three Commodities Set Up For Big Short Squeezes

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Today, I’m going to share with you three commodities that appear to be set up for massive short squeezes, one of which I just bought yesterday.

Commodities are now in a new bull market. Gold signaled the start of one, when it broke out to new highs last month. And now, one by one, various precious metals have been breaking out to follow it up.

Silver did it as well when it went through the $26.00 level, and now silver stackers seem to be winning. Copper has broken out, too. And so has the BCIM industrial metals ETF. Additionally, platinum did so as well this past week.

So, what is behind these rallies?

The Wall Street Journal posted an interesting article yesterday morning, claiming that the commodity rallies are a sign that the global economy is actually firming up. They cite improving industrial production numbers in China, saying that a growing demand for commodities is starting.

Another line of thought is that more government money printing, as well as the growing federal deficit, suggest that inflation is not going to go away and it will only get worse, so people around the world are hedging what that fallout will bring in the future.

Maybe that is why gold hasn’t needed interest rate cuts to go up. Whatever you want to believe, the fact that gold and many commodities are coming out of stage one bases and starting new stage two bull markets is all you need to keep in mind as an investor or trader in them.

But, the game is just starting, and some commodities are not far off their recent lows.

I went through the CFTC commitment of traders reports to look inside the futures market positioning and see if I could find some commodities vulnerable to short squeezes.

These reports break up the futures traders into various categories, including large commercial hedgers and producers, managed money (hedge funds), and small traders. Typically, the large commercials and producers are always net short in the futures market, because they use the futures market to hedge what, for them, are real world operations.

Think of an oil company that is producing oil and shorting oil futures to lock in their prices. They are not speculating, in the sense of trying to bet on price movements to make money, but are using the future markets to hedge their real world operations.

They are almost always net short, as they are almost always hedging, so when they get net long in a market, it is something that typically happens after a big bear market is over and they see little downside risk.

They tend to be right at these moments, being the “smartest” players in the market with the most knowledge of the market they are connected to, unlike the managed money men and small traders, who are speculating on pure price action and often know nothing beyond that.

It’s a massive knowledge gap – and when the “smart” money is net long and the small players and hedge funds are net short, you are looking at what is likely a major cycle bottom. Therefore, you have all the ingredients for a big short squeeze.

Most hedge funds and small traders do not beat the market. Corn, soybeans, and palladium are now in a position in the futures market in which the “smart money” is net long and the hedge funds, and small fries have big net short positions. Here is the latest CFTC report for palladium.

The large producers and swap dealers are long about 12,000 palladium futures contracts and short only 1,800. The managed money hedge funds are long 3,801 and net short a whopping 14,506 contracts. That’s a huge short position in palladium futures that is vulnerable to a short squeeze.

Here is a chart of palladium.

The palladium short sellers have increased their positioning as the price has fallen in the past two years. In fact, these sellers have never been this net short in the history of palladium futures trading.

Take a look at this chart from Barchart for palladium with the CFTC futures data on the bottom, and you can see what I mean.

The blue line on this chart is the net short position for the non-commercials managed money people. As you can see, it has never been this negative before. The green line is for commercial swap dealers, and the red line is for the commercial producers. They have almost always been net short, going all the way back to before 2007, but they are now net long.

In fact, there has never been this big of a divergence between those being net long and the managed money people being this net short before. This is historic, so I decided to go long palladium yesterday and align myself with the smart money.

I did this by purchasing the abrdn Physical Palladium Shares ETF (PALL). Here is the recent price action in this ETF.

The PALL ETF has been trading in a range between 100 and 80 since October, with a temporary spike up through 110 seen in December. The 100 level is resistance for it. It even reached the $100 mark in pre-market trading today before it came down after the bad CPI numbers hit the markets.

I took a position with a mental stop loss on it at $80. I think this ETF can go to the 200-300 range in the next 16-24 months.

I’d actually prefer it to stay below $100 for a few weeks, trading within the circle I drew on the chart, before breaking out. If it did that, I would likely accumulate more, but it’s just as likely to rally through its 200-day moving average and pivot into a stage two bull market sooner than I’d like.

The metals, such as silver, shook off their gap down opens on the CPI news. I bought it with a small position, so I can hold with a stop loss at 80, for now. Palladium has a price history of just going on big runs quickly out of a bottom.

Meanwhile, I took a look at soybeans and corn, but there are no good ETFs to play them. All I could find for each of them are ETFs that hold only futures contracts in them, and these ETFs have a history of diverging from the proper futures prices at times. So, you really need to play the futures themselves to get involved.

Also, the price patterns suggest to me that the upside for them is 50%-100%, and they often trade with a history of having sudden spikes and then declines.

Palladium trades a bit similar to other metals, although it historically tends to get locked up into what are straight up-and-down moves over a 12-month period once they get going. They trade more smoothly once they are in a trend, much like currencies do.

About 40% of global palladium production is in Russia. That’s probably why the last major peak in the price of palladium coincided with the Russian invasion of Ukraine, and then it went into a bear market that lasted about two years.

It’s also an industrial metal, used mainly in car production, so demand for it declined as the bear market in China ensued, too. You’ll still find negative articles and predictions on it if you go do a google search for it. That’s typical, though, of what you find when a commodity makes a long-term bottom.

Again, this is an investment/trade I have made, and nothing is guaranteed to work. That’s why I have a mental stop loss at $80 on my PALL buy.

More By This Author:

Here Are Trades To Play New Gold/Commodity Bull Market
Gold Hits New High As Federal Reserve Turns Super Dovish To Set Stage For Coming Bubble Bust
The Federal Reserve Interest Rate Projections Are Not Working Like People Think

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