Riskier assets such as commodities and stocks were seriously shaken
this week as the U.S. Federal Reserve failed to lift investor
confidence. At its long awaited meeting it delivered the now famous
“Operation Twist” whereby it will be supporting the long end of the
yield curve thereby attempting to keep borrowing costs low. What spooked
the market however was the comment that the U.S. economy was facing
“significant downside risks”.
As my colleague wrote after the announcement: “With the Fed launching
Operation Twist Bernanke furthermore runs the risk of arriving too late
at the party with a solution for the second time in 10 months as his
QE2 programme last November came so late that the economy had long
rebounded and the programme fuelled a massive commodity rally instead,
which ultimately weighed on U.S. consumers in the first half of this
year and forced the economy into a halt yet again.” Full text here.
By avoiding a new QE2 style liquidity injection Bernanke at least removed the fear that another round of galloping commodity prices could be on the cards. This could help consumers and manufacturers who have been struggling amid higher prices of anything from copper to gasoline but at the same time confidence is being hit by the ongoing sell-off in equities.
By avoiding a new QE2 style liquidity injection Bernanke at least removed the fear that another round of galloping commodity prices could be on the cards. This could help consumers and manufacturers who have been struggling amid higher prices of anything from copper to gasoline but at the same time confidence is being hit by the ongoing sell-off in equities.
Changing investor attitude towards dollars
The European debt crisis helped the dollar climb to a seven-month high thereby weighing down the whole commodity complex as it became more expensive for buyers using other currencies. Last week the speculative dollar position held by hedge funds through IMM currency futures moved into positive territory for the first time in 14 months showing how the attitude towards dollars has changed dramatically over the last few weeks.
The European debt crisis helped the dollar climb to a seven-month high thereby weighing down the whole commodity complex as it became more expensive for buyers using other currencies. Last week the speculative dollar position held by hedge funds through IMM currency futures moved into positive territory for the first time in 14 months showing how the attitude towards dollars has changed dramatically over the last few weeks.
Commodities suffered the worst setback in more than four months on
worries that a global recession could hurt demand for metals, energy and
food. The Reuters Jeffries commodity index lost 8 percent in the week
as every single commodity moved into the red. Interestingly gold, which
has otherwise been viewed as a safe harbour amid stormy seas, also took a
beating.
Gold falling victim to excessive volatility
Over the last month gold has made a new record high twice but has also been exposed to three 100+ dollar corrections. This has at least near-term reduced the safe haven flows as the increased volatility has made it increasingly difficult to trade and has prompted some gold bulls moving to the sideline to wait for lower prices and hopefully calmer trading conditions. During the same time investors in ETFs and futures have reduced exposure to gold by nearly 300 tonnes to 2,935 tonnes as cash and/or bonds have met increased demand.
Over the last month gold has made a new record high twice but has also been exposed to three 100+ dollar corrections. This has at least near-term reduced the safe haven flows as the increased volatility has made it increasingly difficult to trade and has prompted some gold bulls moving to the sideline to wait for lower prices and hopefully calmer trading conditions. During the same time investors in ETFs and futures have reduced exposure to gold by nearly 300 tonnes to 2,935 tonnes as cash and/or bonds have met increased demand.
LBMA expects gold at 2,019 next November
This week bankers, traders and investors at the gold industry’s largest annual gathering in Montreal predicted that the decade long Bull Run would continue into 2012. The 500 people attending the conference of the London Bullion Market Association predicted that gold would be trading at 2,019 dollars per troy ounce in November 2012. Last year when gold traded at 1,298 they predicted a price of 1,450 at this meeting, a 25 percent undershot from the 1,805 traded this Tuesday when the poll was made.
This week bankers, traders and investors at the gold industry’s largest annual gathering in Montreal predicted that the decade long Bull Run would continue into 2012. The 500 people attending the conference of the London Bullion Market Association predicted that gold would be trading at 2,019 dollars per troy ounce in November 2012. Last year when gold traded at 1,298 they predicted a price of 1,450 at this meeting, a 25 percent undershot from the 1,805 traded this Tuesday when the poll was made.
Having dropped more than 10 percent from the record high support is
again being sought with 1,650 followed by 1,600 being the next major
levels to look out for. Further dollar appreciation could trigger such a
move but the positive long term projections for gold should help
cushion any further setbacks.
Industrial metals suffer the most
Metals related to industrial use however have been the main losers with copper, silver and palladium suffering deeper setbacks. Silver lost an unprecedented 20 percent in just two trading days while copper, a gauge for global economic activity, fell into a technical bear market having lost more than 20 percent from the February high. Platinum is trading at the widest discount to gold in almost two decades as recession fears has removed some of the demand from industrial users which normally caters for more than 50 percent of platinum consumption. Investors looking for an economic recovery should watch this ratio closely as platinum has traded at an average premium to gold of nearly 40 percent over the last decade.
Metals related to industrial use however have been the main losers with copper, silver and palladium suffering deeper setbacks. Silver lost an unprecedented 20 percent in just two trading days while copper, a gauge for global economic activity, fell into a technical bear market having lost more than 20 percent from the February high. Platinum is trading at the widest discount to gold in almost two decades as recession fears has removed some of the demand from industrial users which normally caters for more than 50 percent of platinum consumption. Investors looking for an economic recovery should watch this ratio closely as platinum has traded at an average premium to gold of nearly 40 percent over the last decade.
Oil markets confined to wide range
Crude oil, having failed to break higher last week, was caught up in the torrent of negative macro-economic news and dropped the most in two months. The surging dollar and the U.S. Federal Reserve’s failure to pull another rabbit out of the hat left traders focusing on reducing exposure. The moves go somewhat against the fundamental background as continued tightness especially in Brent crude, combined with a continued fall in inventories at Cushing, the delivery hub for NYMEX WTI crude, failed to receive much attention.
Crude oil, having failed to break higher last week, was caught up in the torrent of negative macro-economic news and dropped the most in two months. The surging dollar and the U.S. Federal Reserve’s failure to pull another rabbit out of the hat left traders focusing on reducing exposure. The moves go somewhat against the fundamental background as continued tightness especially in Brent crude, combined with a continued fall in inventories at Cushing, the delivery hub for NYMEX WTI crude, failed to receive much attention.
The overall worry is that demand for energy in the U.S. and China,
the world’s two largest consumers, may fall as their economies slow
down. These two nations, according to BP Plc, were responsible for 32
percent of global oil demand in 2010 and if adding the 17 countries
using the euro this percentage rose to a total of 44 percent.
The civil war in Libya, which removed high quality crude from the
market, has now almost ended. Experts on the ground are now predicting
that oil could begin to flow in decent quantities much sooner than
originally expected. These additional barrels will hit the market at a
time where demand is softening and could force OPEC to address their
current output levels. They do not want to see a repeat of the price
collapse from 2008 to 2009 given the much higher need for revenues to
balance their budgets.
For now the most likely outcome of the market action is one of
continued range trading. Brent Crude having been rejected at 117 went
looking for support and should find some at 100. Meanwhile WTI crude
having revisited the 80 dollar mark will now find resistance at 85 and
support at 75.70, the August low.
Grain speculators suffer blowout
Hedge funds and large investors, who up until recently increased their long exposure to soybeans and corn, suffered heavy losses this week as the commodity deleveraging also hurt the grain sector. The price of new crop soybeans which only recently traded at 14.65 dollars per bushel suffered its biggest weekly loss in more than two years touching 12.50, as the surging dollar combined with signs of demand destruction took its toll.
Hedge funds and large investors, who up until recently increased their long exposure to soybeans and corn, suffered heavy losses this week as the commodity deleveraging also hurt the grain sector. The price of new crop soybeans which only recently traded at 14.65 dollars per bushel suffered its biggest weekly loss in more than two years touching 12.50, as the surging dollar combined with signs of demand destruction took its toll.
The stronger dollar has led U.S. growers to face stiff competition on
the international grain market with Russia still winning the big wheat
tenders while Brazil, having seen its currency drop 16 percent, has
stepped up its export of soybeans at very competitive prices.
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