Commodity price movements continue to be directed by macroeconomic
concerns in the near-term. Gold jumped to a new record high of 1637.5 on
Friday as US growth missed expectations. The yellow metal's rally to
new highs in 3 out of the past 5 days signaled market worries over
uncertainties. The debt ceiling debate in the US has dominated the news
headline for the whole week. The latest development is that House
speaker Boehner's revise plan was passed in the House but was defeated
in the Senate. Meanwhile, the majority Senate leader Reid modified his
proposal, incorporating Minority Leader Mitch McConnell's '2-step'
process (the loan will be provided in 2 installments of 1.2 trillion,
one immediate and another when the nation is near the debt limit again)
to raise the debt ceiling. Economists generally do not expect the new
plan to be the resolution for the debt problems.
On Friday, market sentiment was deteriorated further as US economic
growth disappointed in 2Q11. GDP expanded an annualized +1.3% in 2Q11.
The market had anticipated a strong expansion of +1.7%. For the first
quarter, GDP growth was revised lower to + 0.4% from +1.9% estimated
previously. Economists have revised down their forecasts for this year
and 2012 after the report. For example, Bank of America Merrill Lynch
cut US' growth by -0.6% to just 2.3% in 2012 and pushed back the first
Fed hike to 2013. Barclays Capitals reduced the country's growth
forecasts to +1.7% and +2.4% for 2011 and 2012 respectively.
As the August 2 debt limit deadline approaches, the market has
increasingly worried about a government shutdown and debt default. While
our central view remains that lawmakers will compromise on a plan to
avoid default, any deal will only be able to solve problems in the
short-term, rather than in the long-term. Against this backdrop, as well
as slowdown in economic growth and delay in Fed' rate hike schedule,
gold should remain well-supported and be able to rally higher from
current level later this year.
We have a busy calendar next week. While the market will be closely
monitoring developments in the US debt ceiling debate, RBA, BOJ, ECB and
BOE will be meeting on monetary decisions during the week. PMIs will
also be released and moderation in manufacturing activities in China,
the USD and the UK will probably weaken sentiment further.
Energies: WTI crude oil price was pressured last
week amid debt uncertainties. The decline accelerated on Wednesday after
unexpectedly large stock-builds and on Friday after downside surprise
in US growth. The front-month contract declined -4.18% during the week.
Brent crude oil price also dropped, recording weekly loss of -1.63%, but
price remained within recent trading range of 115-120.
According to the DOE/EIA report, crude stockpile increased for the
first time in 8 weeks, by +2.30 mmb, to 354.03 mmb in the week ended
July 22. Current level of oil inventory has stayed at the top end of the
5-year range. However, with the release of SPR eventually reflecting in
inventory data, the level is expected to rise further and exceed the
5-year range in coming weeks. Fuel demand has been soft. Gasoline demand
has averaged 9.09M bpd over the past 4 weeks, down -3.31%, from the
same period last year while distillate demand fell -3.51% y/y to 3.48M
bpd over the last 4 weeks. The coincidence of SPR release and seasonal
weakness in US fuel demand should result in further widening of the
WTI-Brent crude spread.
US gas price lost more than -5% during the week. Gas storage increased
+43 bcf to 2714 in the week ended July 22. The addition exceeded market
expectations and triggered a slump in gas price. Stocks were now -201
bcf less than the same period last year and -65 bcf below the 5-year
average of 2779 bcf. Separately, Baker Hughes reported the number of gas
rigs fell -12 units to 877 units in the week ended July 29.
Precious Metals: Reuters' biannual poll of precious
metals price forecasts indicated that investors are more bullish on
gold's outlook than 6 months ago. The survey showed that over 50% of the
respondents expected gold price to average 1500/oz or more this year,
compared with just over 20% in a poll conducted in January. The median
gold price forecasts are 1510 in 2011 and 1575 in 2012, up from
January's forecasts of 1453 and 1425 respectively. Macroeconomic
uncertainty is the main reason driving investors to Gold.
Although European finance ministers agreed on new measures to contain
sovereign debt crisis in peripheral countries, market worries have not
been alleviated, as indicated in widening yield spread and CDS spread.
Meanwhile, rating agencies S&P and Moody downgraded Greece's rating
last week despite the new bailout plan. Both agencies warned that a
default is inevitable. These suggest that the measures announced after
the EU summit can at most soothe the situation in the near-term while
core problems remain unresolved.
In the US, the deadlock over US debt ceiling has hurt confidence.
Although in the event that the Congress eventually agrees to a debt
ceiling rise, the US still lacks a long-term and feasible plan to reduce
deficits. We expect investors, be it official, institutional and
retail, to reinforce their efforts to diversify their asset away from
USD. This provides a good opportunity for gold investment.
The deteriorating economic condition in the US will lead the Fed to
delay its tightening schedule. While the market has been worrying about a
default in US debt, any agreement in raising the debt ceiling and
deficit cutting will only lift USD temporarily. Fiscal tightening may
trigger the Fed to extend and expand monetary easing to stimulate the
economy. Even if there's no QE3, the Fed funds rate will stay at
exceptionally low level for a longer period than previously expected. As
long as interest rates remain low, we believe gold will surprise to the
upside.
Gold is also appealing as it protects investors during periods of
inflation and deflation. Elevating inflation pressure is what the global
economy is experiencing. In China, CPI jumped at the fastest pace in 3
year to +6.4% y/y in June from 5.5% y/y in May. Australia's latest
report shows that headline CPI eased to +0.9% q/q% in 2Q11 from +1.6% a
quarter. The moderation was not as much as expected. On annual basis,
inflation rose to +3.6%, up from +3.3% in 1Q11. New Zealand's inflation
has continued to overshoot the central bank's 1-3% target. In the US,
core inflation was strong although headline CPI unexpectedly declined in
June. The rise in global inflation should lead to the rise in gold
demand.
source:Baker Hughes
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