It’s the start of the year and that means index rebalancing flows. A big one on the radar right now is the Bloomberg Commodity Index (BCOM), and the flows this year are large.

Scotiabank is out with a note breaking down the flows, which start tomorrow and run through Jan 14, with 20% of the buying/selling done each day.

As usual, this is a case of ‘sell the winners, buy the losers’, which is something we’re not-coincidentally seeing in other markets as well. Because precious metals ripped higher last year while crude oil struggled, the index has to adjust back to target weights. That means selling what went up and buying what went down.

Breakdown of the estimated flows:

The Sells:

Combined, that is over $14 billion in notional selling pressure hitting the precious metals complex over five days. Scotiabank notes that while volume in silver has been high recently (thanks to new all-time highs), this trade still represents about 17% of open interest on March futures.

I don’t think this was a surprise but maybe it helps s to explain some of the selling in silver today.

The Buys:

Brent crude:+$3.6 billion (58k contracts)

WTI crude:+$2.4 billion (42k contracts).
Cocoa:+$2.2 billion.

Watch out for Cocoa

The most crowded trade relative to the market might actually be in Cocoa. It’s returning to the benchmark index for the first time since 2005. The buying flow there represents 56% of open interest and 2.8x the average daily volume. Expect some real volatility there in a market that’s been unusually quiet lately.

cocoa futures

The takeaway

Usually, you’d expect this kind of supply overhang to crush gold and silver prices. However, Scotiabank takes a different view. They argue that fundamentals remain a tailwind for metals and suggest buying on any weakness caused by these flows.

On the flip side, they are bearish on Crude despite the buying pressure, citing excess supply capacity and a sluggish demand outlook.

The rebalancing begins at the close on Thursday.