Gold price rallied +2.3% to 978.5 Wednesday despite weakness in equity and oil prices. Investors’ concern over the US banking sector boosted demand for safe haven. As we noted yesterday, gold’s firmness despite dollar’s strength and stock markets’ weakness probably signaled the comeback of the tallow metal’s appeal as a safe haven. We have more confidence in this notion as gold soared more than +2% while the dollar index only pulled back -0.5% to 78.37 yesterday.
In the FOMC minutes for the meeting in August, the Fed stated that ‘banks still faced a sizable risk of additional credit losses and that many small and medium-sized banks were vulnerable to deteriorating performance of commercial real estate loans’. The S&P 500 Bank Index plummeted to as low as 118.05, the lowest in a month, after the minutes. The gauge eventually closed at 118.33, -1.9%.
Seasonality may also help the yellow metal break above the recent trading range and surge to new high. The chart below shows that September is the best performing month for gold. In fact, historical data indicate that gold performs better in the second half of a year as there are many festivals in India and China that trigger consumers to buy gold for celebration.
For instance, Diwali, or the Festival of Lights, is an important festival in India and is celebrated in October. This is then followed by the wedding season and gold is the most valuable thing to show prestige of the bride and the family. In China, lunar New Year normally comes in January or early February and rich Chinese like buying gold jewelry for celebrations.
Crude oil price plunged shortly after release of oil inventory report but then rebounded. Net net, the benchmark contract ended the day at 68.05, unchanged from the prior day. Performance of product prices was mixed with RBOB gasoline adding +1.5% to 1.81 while heating oil sliding -0.5% to 1.75.
Crude inventory declined -0.37 mmb to 343.4 mmb. This was worse than expected as increase in refinery runs were partly offset by rise in crude import. Gasoline stockpile drew -3 mmb with demand jumping +4.1% to 9.478M bpd from a week ago. However, we believe the surge was a bit exaggerated as retails stockpiled fuels ahead of the Labor Day holiday. We remain bearish on the consumption outlook for gasoline as the summer driving season ends while the job market remains sluggush. Distillate inventory increased +1.2 mmb despite modest rise in demand. Distillate demand normally shows more significant improvement in winter (heating seasons) and we will monitor to see if there’s stronger rebound in demand in coming months.
Natural gas extended further weakness and dropped -3.8% to 2.72 Wednesday. The US Energy Department will probably report +67 bcf increase in gas storage to 3325 bcf. Although the potential rise in inventory is more inline with 5-year average of +64 bcf, investors simply finds no reason to buy gas as demand is so weak while supply continues to go up.
