Commodity markets have gone haywire - and hedge funds with picture-perfect timing are set to rake in stellar profits.
As U.S.-China trade tensions escalated mid-June, fast-money traders flipped to a short position in metals overall, subsequently extending bearish wagers to a record coming into the maelstrom of the past few days.
Hedge funds' net position stood at a negative 51 percent in precious metals and negative 37 percent in base metals as of Tuesday, according to Credit Suisse Group AG prime services.
Never before have the metals in aggregate been shorted to this degree show the data, which captures client exposures to commodity futures and exchange-traded funds since 2010.
The bet has proved prescient. Gold fell to its lowest price since January 2017 this week amid dollar strength, while industrial metals posted their biggest one-day tumble in nearly seven years as negative sentiment in China and Turkey fueled a global risk-off.
"It was very unique to have both shorts at these levels, and obviously profitable," said Mark Connors, head of risk advisory at the Swiss bank.
Hedge funds and other large speculators held a record 63,282 net contracts shorting gold futures and options, according to Commodity Futures Trading Commission data.
Base metals pared some losses at the end of the week, a bounce attributed to signs of thawing trade tensions. Copper futures gained 2.2 percent on Thursday after their worst one-day sell-off in over three years.
Yet the recovery could prove a head-fake, if it's been exacerbated by smart-money traders taking profit from shorts that would have paid off handsomely amid the carnage.
"This certainly can be a short-lived tactical move by funds in base metals," said Connors.
(By Dani Burger).