The annual index rebalancing capital flows have commenced as expected at the start of the new year. The current market focus is on the adjustments to the Bloomberg Commodity Index (BCOM), with this year's capital movements being particularly substantial.
Scotiabank's latest report provides a detailed breakdown of the composition of these capital flows. This index rebalancing will officially begin after the close of trading on Thursday and continue until January 14, with approximately 20% of the buying and selling operations executed daily.
As usual, this process follows the principle of "selling winners and buying losers." This is no coincidence, as investors have observed similar phenomena in other markets. Due to last year's surge in precious metal prices and struggling crude oil performance, the index must be adjusted to realign with its target weights. This necessitates selling the assets that have risen and buying those that have declined.
Here is a detailed breakdown of the estimated capital flows: On the selling side:
Silver: Faces massive selling pressure of up to $7.1 billion. Gold: Has $7.0 billion waiting to be sold.
Combined, this implies the precious metals sector will bear a nominal selling pressure exceeding $14 billion over the next five days. Scotiabank notes that although recent silver trading volumes have already been high (thanks to its record highs), this rebalancing volume still accounts for about 17% of March futures open interest.
Adam Button, who leads and manages investLive, wrote, "I don't think this is surprising, but it might help explain some of the selling silver encountered on Wednesday."
More banks are warning investors: gold and silver prices could experience volatility in the near term.
Commodity analysts at Societe Generale stated in a report released early Wednesday that the annual index rebalancing poses a significant risk to silver and gold prices, as they were the two best-performing assets in 2025. The analysts pointed out that gold and silver constitute about 11% of BCOM. "Silver's strong rally at the end of last year places it at the forefront of expected net selling."
Daniel Ghali, Senior Commodity Strategist at TD Securities, wrote in a report last week, "We expect 13% of the total open interest in the Comex silver market to be sold over the next two weeks, leading to a significant repricing lower."
Typically, one would expect such a scale of supply surplus to heavily depress gold and silver prices. However, Scotiabank holds a different view. They argue that fundamental factors remain tailwinds for metal prices and suggest buying any weakness triggered by these capital flows.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, also stated in a report released Tuesday that any potential weakness could be a buying opportunity, as both gold and silver are set to become cornerstone assets for the global economy at the start of the new year. He said, "(Index rebalancing) highlights the risk of short-term volatility during the rebalancing window, even if any weakness is more likely caused by technical flows than a broader deterioration in fundamentals."
On the buying side:
Brent Crude Oil: +$3.6 billion (58,000 contracts) WTI Crude Oil: +$2.4 billion (42,000 contracts) Cocoa: +$2.2 billion Sugar: +$1.3 billion
Societe Generale sees the most potential in the energy market. This potential shift for energy comes as Brent crude prices fall below $60 per barrel, their lowest level in nearly five years.
However, Societe Generale said the largest potential gains in the near term might come from natural gas. Analysts stated, "Natural gas is no longer expected to be the most sold commodity; due to price declines, natural gas is now expected to be a net buy: its price has fallen 23% since our last analysis in early December."
Nevertheless, Scotiabank believes that despite facing buying pressure, they are bearish on crude oil, citing excess supply capacity and a weak demand outlook.
Additionally, investors need to be wary of trading risks in cocoa.
Relative to its market size, the most crowded trade might actually be in cocoa. This marks the first time cocoa has returned to the benchmark index since 2005. The associated buying flow accounts for 56% of its open interest and is 2.8 times its average daily trading volume. Genuine, sharp volatility is anticipated in this recently unusually quiet market.
Comments