One year ago Ben Bernanke raised the curtain for QE2 in his speech at
the gathering of central bankers at Jackson Hole. Once again his speech
late Friday CET could set the tone for financial markets in the months
ahead as the potential for QE3 has helped trigger some market reversals
during the past week.
The Reuters Jefferies CRB index is up just half of one percent at the
time of writing bringing its annual return close to flat. Last week’s
winners are this week’s losers with gold and silver sitting at the
bottom while energy and base metals had a better week. In the
agricultural space attention turned to wheat. A deteriorating outlook
for U.S. and European production had wheat prices on both sides of the
Atlantic performing strongly.
Weak longs washed out of gold
Gold finally succumbed to a sharp correction as weak speculative longs were flushed out sending the price lower by more than 200 dollars in just two days. What triggered the sell-off was probably a combination of a market that had become too overstretched combined with a 55 percent margin increase by the CME which handles the global benchmark gold futures contract.
Gold finally succumbed to a sharp correction as weak speculative longs were flushed out sending the price lower by more than 200 dollars in just two days. What triggered the sell-off was probably a combination of a market that had become too overstretched combined with a 55 percent margin increase by the CME which handles the global benchmark gold futures contract.
With daily price swings above three percent the CME felt that the
cost of holding a contract worth nearly 200,000 dollars had to be
increased. This brought back memories and fears of a collapse similar to
the one that hit silver back in May which also occurred after a steep
rally was followed by an aggressive margin hike.
Support now at 1,700 dollars
The sell-off however did not go further than 1,705 just short of retracing 50 percent of the recent rally before buyers returned, spurred on by weaker stock markets. The severity of the sell-off has primarily been due to the amount of speculative positions having been built up over the last month and with much of that now out of the way traders felt more comfortable entering the market again. The factors that have been driving gold higher over the last year have not gone away and as such the medium to long term prospect for higher prices hasn’t either.
The sell-off however did not go further than 1,705 just short of retracing 50 percent of the recent rally before buyers returned, spurred on by weaker stock markets. The severity of the sell-off has primarily been due to the amount of speculative positions having been built up over the last month and with much of that now out of the way traders felt more comfortable entering the market again. The factors that have been driving gold higher over the last year have not gone away and as such the medium to long term prospect for higher prices hasn’t either.
The Jackson Hole speech by Ben Bernanke of the U.S. Federal Reserve
Friday could easily set the tone for the coming months, just like it did
last year with the announcement of QE2. High expectations, especially
for another round of quantitative easing, have been dwindling over the
last couple of days. Given that gold would be the main beneficiary of
QE3 a lack hereof could add to the downward pressure.
Support in the market is now at 1,697 dollars which represents a 50
percent correction of the recent rally followed by moving average
supports at 1,570 and 1,480. The uptrend is still firmly in place above
1,450 so even a major drop would not ruin the long-term prospect for
gold.
High volatility points towards a bumpy road ahead
Thirty day volatility as measured by the CBOE gold VIX index has been rising steadily over the last month and the current reading of 34.4 percent is some 64 percent above the 2010 average which was another year of strong gold performance. This is telling us that despite the uptrend firm violent corrections like the one experienced this week can easily occur again. Investors who want to benefit from the gold “bubble” therefore need to show discipline in order to avoid being burnt by a market that has become more erratic.
Thirty day volatility as measured by the CBOE gold VIX index has been rising steadily over the last month and the current reading of 34.4 percent is some 64 percent above the 2010 average which was another year of strong gold performance. This is telling us that despite the uptrend firm violent corrections like the one experienced this week can easily occur again. Investors who want to benefit from the gold “bubble” therefore need to show discipline in order to avoid being burnt by a market that has become more erratic.
Oil markets driven by Libya and Irene
Early in the week the prospect for high quality Libyan oil returning to the market initially sent oil prices, especially Brent crude, lower. The “relief” sell-off was short lived despite rebel forces entering into Tripoli and thereby bringing forward the potential downfall of Colonel Gaddafi. Traders are fully aware that it could still be many months before oil begins to flow in decent quantities. Many obstacles need to be addressed first, such as establishing security around major fields, pipelines, refineries and ports, a renegotiation of existing contracts and the return of foreign personnel.
Early in the week the prospect for high quality Libyan oil returning to the market initially sent oil prices, especially Brent crude, lower. The “relief” sell-off was short lived despite rebel forces entering into Tripoli and thereby bringing forward the potential downfall of Colonel Gaddafi. Traders are fully aware that it could still be many months before oil begins to flow in decent quantities. Many obstacles need to be addressed first, such as establishing security around major fields, pipelines, refineries and ports, a renegotiation of existing contracts and the return of foreign personnel.
The price of Brent crude initially dropped to 105 dollars on the news
from Libya but spent the rest of the week recovering back towards 110
as possible sanctions in Syria and force majeure in Nigeria supported
prices. Oil demand, especially for diesel, from India and China picked
up in July lending support to a Brent crude price above 100 dollars. The
spread over WTI crude initially narrowed but has since widened back
above 25 dollars as increased U.S. and Canadian production is not easily
moved out of the producing regions to the coast from where it can enter
into the global market place.
Irene could become the worst in fifty years
Irene, the ninth hurricane of the season is threatening to disrupt gasoline supplies along the U.S. East Coast over the coming days and this helped gasoline putting in a strong performance on the week rising by nearly four percent. It has the potential for becoming the worst hurricane in 50 years and although it is expected to weaken Saturday into Sunday it will probably not happen fast enough to prevent serious problems from wind, rain and ocean water.
Irene, the ninth hurricane of the season is threatening to disrupt gasoline supplies along the U.S. East Coast over the coming days and this helped gasoline putting in a strong performance on the week rising by nearly four percent. It has the potential for becoming the worst hurricane in 50 years and although it is expected to weaken Saturday into Sunday it will probably not happen fast enough to prevent serious problems from wind, rain and ocean water.
Wheat outperforming corn
The price of December CBOT wheat has risen strongly once again approaching 8 dollars per bushel after touching a low of 6.5 dollars back in July. Record high corn prices are causing livestock farmers to switch to wheat feed. A year-long drought from Texas to Kansas has created the driest conditions on record for farmers who should now be preparing to plant winter wheat. Meanwhile, in Europe the corresponding Milling wheat contract rose the most on the week as Western Europe continues to experiencing tough harvest conditions after a very wet summer. Continued rainfall could result in a higher percentage of wheat being used for livestock feed instead of human consumption thereby adding upside price pressure on high quality wheat.
The price of December CBOT wheat has risen strongly once again approaching 8 dollars per bushel after touching a low of 6.5 dollars back in July. Record high corn prices are causing livestock farmers to switch to wheat feed. A year-long drought from Texas to Kansas has created the driest conditions on record for farmers who should now be preparing to plant winter wheat. Meanwhile, in Europe the corresponding Milling wheat contract rose the most on the week as Western Europe continues to experiencing tough harvest conditions after a very wet summer. Continued rainfall could result in a higher percentage of wheat being used for livestock feed instead of human consumption thereby adding upside price pressure on high quality wheat.
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