Alan's Finance Blog

Strong China Commodity Demand Can Boost Gold Price as It Increases Inflation Pressure

Gold price stays firm in European morning as the dollar continues to weaken against major currencies. We receive strong trade data from China yesterday but most investors only related strong imports to crude oil and base metals. This is understandable as China has become the world’s largest gold producer.

However, strong imports can still help boost gold price, in an indirect way. Robust demand from China tightens physical markets and increases inflationary pressure. This will force the Chinese government to appreciate RMB, despite in a small magnitude. Appreciation in RMB is positive for commodity in general. At the same time, the disappointing US employment data in December may help reinforce the Fed’s stance to keep its policy rate low for an extended period. An environment of low interest rate together with rising inflationary pressure is supportive for gold.

The strong momentum in Chinese commodity demand in 2009 should carry forward to 2010 although the pace may moderate due to unwinding of stimulus measures. Copper imports rebounded sharply to 369.4K metric tons in December (+29% yoy) after plunging to 263.1K metric tons in October. Imports reached a record high of 477.K metric tons in June. Iron ore and concentrate also recorded a prominent +80% yoy increase to 62.16M metric tons during the month. However, not all base metals received strong demand. Take a look at aluminum. Despite strong annual increase, the amount imported in December stayed at depressed level (-73% from record high made in April 2009). The reason is that Chinese production of aluminum rose in recent months and it’s expected China will become a net exporter of aluminum in 2010.

Surge in demand for iron ore and concentrate has been driven by strong auto sales which drove demand for steel higher. According to the China Association of Automobile Manufacturers, China’s sales of passenger cars, buses and trucks rose +46% to 13.6M units, the fastest pace in 10 years. This also suggested that China has taken over the US’s throne as the world’s largest auto market.

Crude oil price falls for a second day in European session. Currently trading at 81.75, the February contract has plummeted -2.6% from a 15-month high at 83.95 made yesterday. Apart from crude oil, others in the energy complex also gets hammered as weather in the Northern hemisphere is expected to get warmer later this week. Heating oil drops to 2.16 while gasoline falls to 2.135. Both commodities reached 15-months Monday.

Source: Oil n Gold

Crude Reverses Gains as China Raises Yield and Weather May Get Warmer

Crude oil reversed gains after failing to test 84 in NY session Monday. The February contract ended the day at 82.52, down -0.3%. Currently trading at 81.9, the decline accelerates as the central bank of China rolled out more tightening and weather forecasts suggested temperature will turn warmer later this week.

The People’s Bank of China (PBOC) sold 1-year bills at a yield of 1.8434% in open market operations. The yield has been staying at 1.7605% since August 2009. This may be a sign that China is trying to tighten the market more aggressively than expected. Last Thursday, PBOC offered RMB 60B worth of 3-month bills at 1.3684% in its weekly open-market operation, +4 bps higher than the rate kept since August. The move indicates that China would continue to guide market interest rates higher and absorb liquidity from the market through issuance of central bank notes.

Weather forecasts said that temperature will return to normal in eastern cities such as New York and Boston later this week. This news dampened bullishness as recent rally in energy price was driven by extremely cold weather in the Northern hemisphere. Traders believed the adverse weather condition should boost demand for energy.

Gold price settled at 1151.4, up +1%, after surging to as high as 1163 yesterday. A weak dollar may help push the yellow metal higher this week. Platinum extends its rally to 1602.5 in Asian session today. The benchmark outperformed others as the launch of the first US ETF spurred investment demand.

Last Friday, ETF Securities’ first US platinum and palladium ETFs started trading with strong volume. Initial allocation of the platinum and palladium ETFs were 9,969 oz and 9,996 oz, respectively, volume traded on the first day (reflecting both primary and secondary trade) reached 414,742 shares for platinum and 294,943 shares for palladium. Platinum holdings in the non-US ETFs also rose modestly by +158 oz to hit a fresh high, while palladium holdings fell by -5.5k oz to 1.155M oz.

Source: Oil N Gold

Strong China Imports Pushed Crude Price Higher

Crude oil price rose to as high as 83.67 after China reported strong imports in December. In 2009, robust demand in emerging countries, especially China, was the major driver for energy prices. We expect the strength to continue this year although withdrawal of stimulus measures may slow the pace modestly.

According to the Chinese Customs, crude oil imports surged +24% to 21.26M metric tons in December. On annual basis, the nation imported 203.8M tons in 2009, compared with 178.9M metric tons in the previous year.

Industrial activities in Asia has been picking up rapidly after slumping to very low levels in early 2009 as driven massive government stimulus plans. In China , the government implemented a plan worth $506B to stimulate growth, particularly in infrastructure and construction sectors. As a whole, the nation’s GDP is expected to grow by more than +8%.

The market’s focus is not policy tightening this year. Demand outlook for commodities will be affected if China starts tightening. However, we believe the government will only exit from the stimulus plans after a self-sustainable growth is seen in the economy. Therefore, the negative impact on commodity prices should not be too much.

Gold price rallied for the second consecutive day amid USD’s correction. The February contract for the yellow metal surged to a 1-month high of 1163 as the dollar’s decline for 3-low against the euro spurred gold buying. Disappointment in December employment report lowered expectations for a Fed rate hike as early as in June. Traders liquidated their long positions in USD and turned short.

Commitments of Traders:

Crude Oil: Net speculative long positions rose to 108.8Kcontracts, the highest 10 weeks, as price surged amid strong economic data and extremely cold weather. Although elevated inventory levels suggested energy fundamentals remained dismal, correction in USD indicated crude investment might still be robust in coming weeks

Natural Gas: Net speculative short positions surged to 156.6K contracts. Despite decline in gas inventory, the ample supply continued to depress price

Gold: Net speculative long positions declined 227.8K contract despite rally in price. Although net longs in gold have plummeted more than -10% from the peak in November, they remained at high levels

Silver: Net speculative long positions in silver rebounded to 395K last week. Silver price rose to a 1-month high as signs of global economic recovery spurred speculations that demand for silver in industrial activities should rise

Platinum: Net longs soared to 20.4K contracts, the highest level in 4 weeks. While strong auto data in China and OECD economies were supportive to price, launch of the first-ever platinum ETF in the US triggered investment demand

Energies Extend Gains as Strong China Trade Drives Sentiment

Crude oil extends rally to 83.95 in European session. Weakness in USD, abnormally cold weather in the Northern hemisphere and strong demand from China are pushing energy prices higher. Oil products also advance. Heating oil surges to 2.224. The benchmark contract has rallied in the past 4 weeks as government reports showed declines in distillate inventory. Gasoline price also rises to 2.185 as the rally accelerated after an upside break of 2.11 on January 4.

Attacks in Nigeria once again spurred worries about production disruption. Chevron reported that its Makaraba-Uyonana pipe was breached on January 8. This forced the company to shut down 20B bpd of crude oil production.

Rebel groups who want a share of oil revenues have been a threat to Nigeria’s oil production. Among them, the Movement for the Emancipation of the Niger Delta (MEND) is the largest group. The

MEND signed an indefinite ceasefire on October 25, 2009 and agreed to have peaceful talk with the government. However, it resumed attack in mid-December as member was dissatisfied with the progress of the negotiations.

Gold stays strong with other commodities as USD weakens. The February contract rose to as high as 1163 before pulling back to 1157.

USD’s rally against the euro accelerated after breaching the cluster of 1.4218-1.448. Currently trading at 1.453, the greenback has plummeted to a 3-week low against the euro as unexpected decline in payrolls evaporated traders’ hope for Fed’s tightening in 1H10.

Stock markets in both Asia and Europe advance as driven by robust trade data in China. Apart from strong commodity imports, export growth from China, up +17.7%, indicated global economic recovery is taking place in a fast pace.

In Asia, the MSCI Asia Pacific Index ex Japan rose +1.2%. Benchmark indices in Australia rose +0.8% while indices for both China and Hong Kong rose +0.5%. In European morning, UK’s FTSE 100 Index rises +0.6% to 5565.2, Germany’s DAX adds +0.4% to 6065 while France’ CAC 40 gains +0.7% to 4074.

Oil Price Rises Above 80 on Better Macro Outlook but Fundamentals will Play a Key Role in 2010

WTI crude oil extends the 8th day of rally above 80 on speculations for growth in energy demand as US weather remains below-normal. The February contract surged to as high as 81.16, the highest level since October 26, in European session. While macro-economic outlook and equity market performance will continue to play a role in driving crude oil price, a stronger emphasis will be placed on fundamentals this year than in 2009.

Crude oil price advanced +78% in 2009. However, US oil inventory reached the highest level in almost 2 decade. Look at timespreads, the steep contangoes also suggest severe oversupply in the market. At the same time, the correlation between oil price and stock market rose to 45% in 2009, almost doubling that in the prior year. These evidenced that the strong performance of crude oil last year was driven by macroeconomic outlook and market anticipation of better fundamentals in the future.

As we enter 2010, investors should focus on demand growth. Again, it’s widely expected that China will remain the locomotive for growth. According to the US Energy Department, crude oil demand should rise +1.1M bpd to 85.219M bpd in 2010. Of the 1.1M bpd increase in demand, 0.405M bpd will come from China while only 0.09M bpd from OECD economies.

In 2009, the inverse correlation between USD and crude was prominent. However, this pattern may fade this year. The impact of the dollar’s movement on crude oil depends on its cause. For instance, if USD rises as the US economy improves rapidly and outpaces other countries. This would benefit commodities.

Gold price rebounds strongly to 1118 in European session. Having traded below 1100 for most of the time in the last 2 weeks, the yellow metal appears ‘cheap’ to buyers. Unlike crude oil, we expect strength in USD will continue to pressure gold. In fact, the pile-up of huge short USD/long gold positions in 2009 remains an overhang on gold’s outlook.

Dollar’s Rebound Won’t Sustain as No Rate Hike from Fed Soon

Crude oil trades narrowly in European morning. As USD rebounds after Fed Chairman Ben Bernanke’s speech about policy tightening, commodities pare gains. In the energy complex, WTI crude oil pulls back to 71.3, heating oil to 1.836 and RBOB gasoline to 1.766. In the precious metal complex, Comex gold retreats to 1050 while silver and platinum fall to 17.6 and 1345 respectively.

Investors viewed Bernanke’s speech at a Board of Governors conference yesterday in Washington as a sign of potential tightening. However, there’s nothing new compared with the views he expressed in a WSJ article on July 21: ‘At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner’.

In fact, it’s not likely for the Fed to increase interest rate anytime soon. In an interview, Dallas Fed President Fisher said that ‘we are going to move when we have to move. But it’s not now. Things are fragile but they’re moving in the right direction. If you step back, it is going to take a long time to heal from the kind of severe shock we had, the severe correction we had. There is more confidence but it is not anywhere near robust in the job creating private sector’.

Although the dollar reverses ground after Bernanke’s speech, the rally will not be sustainable. Global fundamentals should continue to weigh on the dollar. Bloating US trade deficit and strength in emerging market currencies such as RMB, should continue to pressure the dollar.

Natural gas rose +69 bcf, compared with consensus of +60 bcf, to 3658 bcf in the week ended October 2. According to the US Energy Department, storage stayed +15% above 5- year average. However, gas price climbed for a second day yesterday, partly driven by broad-based rally in the energy complex and partly amid expectations that demand will increase as we enter the winter heating season.

Among the several factors driving gold’s rally, including dollar’s weakness, limited central bank sales, reserve diversification and inflation expectation, we believe the most prominent one is dollar’s weakness. The chart below shows that gold has broken the 2008 record high on October 6 only in dollar term while price remains well below historic high when denominated in other currencies.

Source: Oil n Gold Report

Gold Declines After the 5-day Rally. Correction Should Be Short-lived

Gold price rallied to 1062.7 before settling at 1056.3, +1.1%, as USD plummeted and crude oil soared. The yellow metal retreats to 1049 in Asia Friday, the first decline after surging for 5 days. We believe a correction is warranted as recent rally might have been overextended. However, any pullback should be short-lived. We remain bullish on gold in the long-term.

Investor Jim Rogers said that will not buy gold at current price as fundamentals do not support. However, he reiterated his long-term bullishness on bullion and anticipated it would reach 2000 in the next decade.

Crude oil price rallied to an intra-day high at 72.55 Thursday after the US reported a drop in initial jobless claims. Moreover, weakness in dollar against major currencies spurred demand for commodities. WTI crude oil finished the day +3% higher at 71.69. RBOB gasoline surged +3.5% to 1.78 and heating oil jumped +3.8% to 1.847.

Initial jobless claims fell to 521K in the week ended October 3 from 554K in the prior month. Apart from beating consensus of a fall to 540K, the reading has also reached the lowest level since the beginning of year. 4 week average also fell -9K to 540K from a week ago. The downtrend in claims is encouraging and should signal gradual improvement to employment conditions.

USD declined against major currencies as investors turned to stock markets and higher-yield currencies. The dollar index plunged to 75.68 before rebounding. Against the euro and pound, the greenback slid -0.7% to 1.48 and 1.6067 respectively. Against Australian dollar, the dollar plunged -1.9% to 0.9067 as unemployment rate in Australia surprisingly dropped to 5.7% in September.

According to Financial Times, a number of Asian central banks began intervention to curb the appreciation of their currencies. ‘Asian central banks intervened heavily in the currency markets…to stem the appreciation of their currencies against the US dollar amid fears that their exports could be losing ground against China. The mainly south-east Asian countries have been spurred to defend the competitiveness of their currencies by China’s decision in effect to re-peg the RMB to the dollar since July last year’. However, this did not seem to halt USD’ weakness.

Today, crude oil price retreats and USD rebounds after the Fed Chairman Ben Bernanke said the central bank will be ready to tighten policy when the economy ‘has improved sufficiently’. However, Bernanke stated at current stage ‘my colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period’.

Source: Oil’n'Gold

Crude Oil Recovers after the Plunge. Nr-term Outlook Remains Worrisome

WTI crude oil plummeted after a 2-day rally as petroleum product inventories increased more than expected. The benchmark contract slid -1.8% to close at 69.57. Others in the energy complex also dropped with heating losing -1.7% and RBOB gasoline falling -2.8%.

Crude inventory drew -0.98 mmb with declines seen mainly from the East Coast, Midwest and the Gulf Coast. Cushing stocks also fell -1.4 mmb during the week. Refinery runs were flat from the previous week and we expected to see reduction in coming weeks as weak demand and weak margins should discourage refiners.

Doubling the builds anticipated by analysts, gasoline inventory rose +2.94 mmb although demand rose to 9.27M bpd. Imports rebounded back over 1M bpd. Distillate stockpile also gained +0.68 mmb, compared with market expectation of a draw. Demand increased to 3.53M bpd during the week.

Despite the macroeconomic recovery, the underlying fundamentals in energy market remain weak. Total oil demand will contract on annual basis. On the supply side, non-OPEC countries such as Russia are producing excessive while compliance from OPEC is slipping.

Today in Asia, energy prices rebound as the dollar weakens. Crude oil recovers to 70.1 but we see limited upside as price should falter below 75.

Although Comex gold pulled back from intra-day high of 1049.7, price rallied for a 4th straight day and settled +0.5% higher at 1044.4. It’s impressive that gold remained strong despite dollar’s rebound yesterday. However, trading volume was rather thin and investors should beware of a retreat.

Today in Asia, the yellow metal extends gains and surges to 1051.8, another record high as the dollar resumes decline. Over the past 5 days, the yellow metal has risen +5%. Record high gold price should continue to weigh on physical demand. At the same time, rise in gold price should induce sales of scrap which in turns gold supplies. We worry that higher supply and lower physical demand would trigger price correction. That said, any correction should be short-lived and investors can consider accumulating the yellow metal on pullbacks.

On the macro front, BOE and ECB meetings are the focuses. The BOE meeting will likely be a quiet one as policymakers should maintain the policy rate at 0.5% and the asset buying program at 175B pounds. Since the meeting in September, economic data released signaled the UK’s economic condition has improved and the downturn should have ended in the third quarter. However, these improvements were not sufficient to trigger a BOE tightening.

The ECB should also keep its main refinancing rate at 1%. We expect the ECB President Trichet to comment on the euro’s strength.

Gold Price Made Fresh Record High and Confirmed Long-term Uptrend

Gold price set a new record high Tuesday amid USD’s weakness and renewed inflation worries. The benchmark contract for the yellow metal breached the peak of 1033.9 made in March 2008 and surged to as high as 1045. Price eventually closed +2.2% higher at 1039.7. Others in the precious metal complex also strengthened with silver jumping +4.6% to 17.3 and platinum gaining +1.8% to 1025.3.

USD tumbled Tuesday as RBA’s rate hike heightened the rate differential concerns. Moreover, the dollar was pressured after UK’s Independent newspaper said that the Gulf oil states were talking with Russia, China, Japan and France to replace dollar with other currencies in 9 years. Although the news was denied by Saudi Arabia and Russia, the dollar failed to rebound.

Today in Asia, USD pares losses as Kansas Fed President Thomas Hoenig said that the central bank will need to ‘remove the very accommodative policy sooner rather than later’. Gold price trades narrowly around yesterday’s close. There’s possibility for the yellow metal to pullback after rallying almost +4% in the past 3 days. Silver and platinum continues to extend gains but we believe the rise silver should stabilize as it has gained +7% over the past 2 days.

Crude oil added +0.7% to settle at 70.88. The benchmark contract surged to as high as 71.97 Tuesday. Others in the energy complex had mixed performance. RBOB gasoline and heating oil gained +1.1% and +1.2% respectively while natural gas slid -2.2%.

After market close, API reported its estimates on oil inventory. Crude oil inventory declined +0.3% mmb, compared with consensus of a +2.2 mmb build, to 339.4 mmb in the week ended October 2. Rise in refinery runs slightly outweighed increase in crude imports. Cushing stocks dropped -0.22 mmb. The pleasant surprise came from distillate stockpile which drew -2.91 mmb to167.8 mmb. The market had anticipated another week of build. Gasoline stockpile rose +0.54 mmb, compared with forecast of a +0.71 mmb increase.

The above readings were supportive for oil price and increase the possibility that we will get a set of positive results in the report by the US Energy Department. Crude inventory probably gained +2mmb while gasoline built +1.4 mmb. For distillate, stockpile might have declined -0.4 mmb after months of increases.

US Oil Inventory

Comparison between API and EIA reports:

API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department (EIA)for its weekly survey.  Oil inventories from the API and EIA moved in the same direction for over 70% of the time, using data in the past 4 years.

Source: Bloomberg, API, EIA

USD’s Strength Amid Rate Cut in Russia Put Pressure on Commodities

Crude oil pulls back again after soaring to 67.33 in European morning as USD strengthens. Moreover, mixed performance in European stock markets Tuesday put pressure on energy prices. Although the tension in Iran remains a threat, the actual impact is likely minimal as spare capacity is so ample that producers in other countries can easily produce more to meet demand.

USD rebounds for the second consecutive day against the euro. Current trading at 1.455, the greenback has recovered 1.4% from the 1-year low of 1.4843. Bank Rossii, the Russian central bank, cut its refinancing rate by 50 bps to 10% and reduced the repurchase rate charge on central bank loans, also by 50 bps, to 9% in an attempt to boost economic growth. In the accompanying statement, Bank Rossii said that ‘further steps in lowering interest rates will depend on the need to create conditions for broadening lending and stimulating economic growth, taking inflationary tendency into account’. The action spurs worries on global economic recovery and drives investors back to safer investments.

Economic data released in the Eurozone were largely inline with market expectations. Economic confidence improved to 82.8 in September, slightly higher than consensus of 82.7, from 80.8 a month ago. Other confidence indices also rose during the month with consumer confidence, industrial confidence and services confidence rising also rose to -19, -24 and -9 from -22, -26 and -10.7 respectively.

The market’s focus has been shifted to US’ consumer confidence to be released by the Confederation Board. September’s reading should have risen to 57 from 54.1 in August as driven by better stock markets and stabilized employment conditions.

Gold remains under pressure after failing to re-test 1000 Monday. Strength in USD certainly weighs on the yellow metal. Others in the precious metal complex also decline with silver slipping to 16.1 and platinum edging lower to 1275. Impala Platinum’s production cut fails to help platinum price amid broad-based decline in the complex. According to Impala Platinum, the second largest platinum producer, said production in its Impala Lease Area mine will be lowered by 100K oz from previous estimates of 950K oz due to an accident and a strike.

Base metal prices are mixed today. While copper and aluminum drop, nickel rebounds while zinc has little change today. The major issue in the complex is rapid slowdown in Chinese buying. Take a look at copper, stockpiles has increased to 344.4 metric tons, the highest level since May 19, in LME. Demands have weakened a lot in recent months and this is obviously due to completion of stockpiling in China. The only exception in demand slippage is aluminum as the restocking process has not completed yet. However, we believe demand should reduce in coming months.

Source: Oil n Gold