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Risk Appetite May Have Cooled its Tempo but Oil and Gold Still Set New Highs
Written by article default Tuesday, 09 November 2010 12:21
North American Commodity UpdateCommodities - Energy
A Sixth Consecutive Rally for US Oil Ushers in a Notable Two-Year High
Crude Oil (LS Nymex) - $87.06 // $0.21 // 0.24%
The edge of momentum may have dissipated significantly over the opening 24 hours of the new trading week; but US oil nonetheless maintained its bullish trajectory. In fact, the commodity would put in for a sixth consecutive advance – the longest string of gains in many months. Just as interesting in this consistency of the run was the detail that this particular advance would push crude above $87 through the New York close for the first time since October of 2008. This is a remarkable benchmark; but the lack of momentum on such an occasion cannot be ignored. It is often the case that a very obvious level urges price to test or break a technical boundary to fill pre-set entry or exit orders. From here, the market will likely once again fall back on a clear fundamental catalyst – whether that push is macroeconomic or speculative in nature.
Looking at the energy market through speculative interests, Monday’s performance is particularly remarkable. Looking at some of the other benchmark for investor sentiment trends; we see that the S&P 500 and other benchmark equity indexes were either flat or slightly in the red through their respective closes. This is likely where the lack of momentum comes from. Further making the day’s performance unusual is the fact that the US dollar rallied on the day. The currency itself has a consistent relationship to risk trends; but that usually exacerbates oil’s response on risk appetite trends – as currency and commodity are on opposites sides of that scale. As for basic supply-and-demand factors, the docket was relatively light for the energy crowd. The most consequential event on the calendar as was the German industrial production figure – which subsequently dropped 0.8 percent through September. In the coming session, the data will be a little more intriguing. UK manufacturing activity numbers are backed up by trade, growth estimate, retail sales and housing statistics. Another interesting indicator to watch (and is often overlooked) is the NFIB small business optimism indicator which establishes the health of a group that is essential for employment and growth.
For trading activity, today’s congestion would actually lead to a modest pop in the CBOE’s volatility index for oil. That said, the indicator is still just off its lowest levels in six months. At the same time, volume on the active December futures contract dropped 13 percent from Friday to a two-week low of 276,668 contracts.
Commodities - Metals
Gold Rallies Above $1,400 for the First Time in History and Despite the Dollar’s Advance
Spot Gold - $1,409.55 // $15.90 // 1.14%
Though it wasn’t as momentous as Thursday’s swell, gold nevertheless put in for a remarkable rally to start the week. This advance was good enough to shake Friday’s congestive funk and lift the precious metal above $1,400 for the first time on record. A positive buoyancy shouldn’t be surprising at this point – from either a speculative or fundamental perspective. On the other hand, the metal’s performance is particularly remarkable when we consider that the climb was absent support through either risk appetite trends or a dollar selling effort. This is a unique asset that seems capable of picking and choosing its catalyst for the day as it is more beholden to an underlying fundamental driver. However, no asset can advance unchecked. Will some force hinder its drive in the near future?
In establishing a fundamental support for the precious metal’s performance, it is first important to establish the role risk appetite plays. At this point, gold isn’t playing a straight safe haven asset – though that aspect is certainly there. Instead, we see that with the rise in equities and other securities that are reliant on growth and yield; the metal has shown itself to consistently follow a trend of capital inflow and underlying appreciation alongside other markets. This is a speculative attribute that also has a fundamental backdrop. With a rise in risky positioning, the commodity helps to offer something of a ‘hedge’ whereby pure appreciation in these other assets is purely based on the devaluation of the currencies that are used to value them. As an alternative to traditional currencies and outside the influence of government manipulation of money supplies, gold has something of a buffer to curb the inevitable pain that could come with a risk aversion rise.
As for tangible fundamental concerns, there is a natural alternative to the seemingly consistent concern surrounding the Fed’s constant inflation of the US money supply (which subsequently waters down the value of the currency): European financial troubles. Balancing support for economic expansion and the effort to cut deficits that are running above regional limits has been a losing battle for Greece, Ireland, Portugal and Spain among others; but this particular concern has been pushed into the background somewhat recently as support from the US central bank helped to offset reality. That said, in the past week we have seen yield spreads on these European Union members inflate to record highs. This could be the top headline for days or weeks ahead.
As for trading activity, volume on the December futures contract dropped 32% from Friday to 165,292. That said, total ETF holdings of the precious metal rose 0.2 percent (the biggest jump since October 14th) to 67.2 million ounces. Furthermore, the two-year contango (difference in price between the nearby and two-year deferred futures contracts) saw its biggest jump since May.
Spot Silver - $27.75 // $1.01 // 3.76%
Silver is running on its own speculative fuel. A third consecutive rally was more of a surge; and this drive pushed it to a fresh three decade high. Talk of manipulation will certainly grow with this strength – a concern with open interest at a 32 month high.