Posts Tagged ‘Commodity Markets’
(VIDEO) Is Natural Gas the Next Big Thing?
By Elliott Wave International
Natural gas rallied 40% in the last two months. Is the cleaner alternative to crude oil braced for another big move to the upside?
EWI’s Senior Analyst Jeffrey Kennedy joins Yahoo! Finance Breakout host Jeff Macke to offer his take on what’s in store for the market that has plagued long-term investors since falling over 80% from its 2005 highs. Kennedy takes viewers through the technicals and offers his long- and short-term forecasts for the market.
Enjoy the interview that was originally recorded on June 19, 2012.
 | Get 6 Free Lessons to Help You Find Trading Opportunities in Any Market In this FREE report from Elliott Wave International, Senior Analyst Jeffrey Kennedy presents 6 different lessons that you can apply to your charts immediately. Learn how to spot and act on trading opportunities in the markets you follow. |
This article was syndicated by Elliott Wave International and was originally published under the headline (VIDEO) Is Natural Gas the Next Big Thing?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
The Great Grain Bonanza
By Andy Hecht, Editor, Trader Hunter & Commodity Trend Alert
Dear Sovereign Investor,
I attended a banquet in Beijing in 1989, not long after the Tiananmen Square massacre. It was a strange time to be in China. A senior government official at my table denied the massacre had even taken place.
As the subject switched quickly to economics, he also told me of his government’s multi-decade plan for slow growth.
Well, that wasn’t very accurate either.
Growth – yes; slow – not even close.
Chinese economic growth has surpassed the wildest dreams – and fears – of the west. But as China’s global power has expanded, so too has their dinner-table sophistication and the investment opportunity…
Even back then, I knew China was the demand side of the equation in the commodities markets. Today, the Chinese are driving automobiles instead of riding bicycles. They are using computers. They are drinking fine wines.
The Chinese have also changed their diet from basic rice to more complex grains and animal proteins. This dietary transformation lies at the very heart of a very profitable opportunity.
As Chinese Wealth Grows, the
Price of Grain Rockets
In 2001, China joined the World Trade Organization. Since then, the slow and steady march of the Chinese economy has turbo-charged the price of grain. The following chart shows how price in the key grain markets of soybeans, corn and wheat has skyrocketed since 2001:
China’s Energy Demand is
Part of the Equation
Global demand for crude oil has increased by 1% over the past quarter alone. Yet at the same time, the U.S. Energy Information Administration (EIA) reported earlier this month that China’s oil consumption during the same period increased by 4.6% to 10.24 million barrels per day.
The contrast between the demand for oil in fast-growing China and demand in the rest of world is obvious. But why is this important for grains? Well, it turns out that as prices for crude oil increase, demand for biofuels such as ethanol and fuels made from other grains also increases.
And therein lays the logic of another profitable vertex – as China’s thirst for fuel increases, so too does the price of both grain and oil.
Further Reasons for the Long-Term
Surge in Grain Prices
There are further reasons for the long-term surge in the price of grain…
An Appetite that will Drive Prices Higher: In 2008 droughts, floods and other climate events caused grain prices to soar as crop yields decreased. But based on projected consumption of grains in China, even in a perfect crop year where soybean, corn and wheat yields are at a peak, rising demand from China will support even higher price levels.
The World’s Top Grain Importer in Less Than a Decade: China is fast becoming the world’s largest importer of agricultural products, and within the next five to 10 years it will be there.
Thanks to the fact that China’s per capita farm land is less than 40% of the world’s average, the mass importation of soybeans is inevitable.
Demand Keeps Rising: Earlier this year, China used up her strategic stockpiles of soybeans as the price of edible oil skyrocketed. The country supported local manufacturers of edible oils by supplying soybeans from stocks bought at lower prices. China then showed up as a buyer of soybeans when the market moved lower during the third quarter.
The Chinese still have an appetite to replace their strategic stockpile.
China has also become a net importer of corn this year after 14 years of self-sufficiency. The domestic demand for animal protein has increased China’s demand for corn.
Loving U.S. dollar is Also Pushing Prices Up: The long-term bear market in the U.S. dollar has also contributed to higher commodity prices across the board. Grain prices have moved higher because of the falling greenback.
China is competing for finite stocks of food-stuffs: China last year imported 54.8 million metric tons of soybeans – some 80% of its domestic consumption. As the Chinese include more meat in their diets, the country has become a key player in the global corn trade. Current projections are that China will import five million tons of corn this year. It is already the top importer of soybeans and cotton and a major importer of sugar.
The Bottom Line
China has undergone dramatic changes since 1989. Today it is an advanced nation with advanced desires and appetites, and there is only so much land on the globe suitable for growing staples.
We have only seen the beginning of a rally in the grain markets. The increasing sophistication of the Chinese appetite has created an environment for grains to continue to move higher. And you should expect much higher prices in the years to come.
Shares in food processing companies such as Archer Daniels Midland (ADM) and Bunge (BG) are poised to rise. These are a good way to play the bull market in grains. And, for the more adventurous, the grain futures markets offer investors the opportunity to buy futures and options.
Make sure that you include long-term exposure to grains in your investment portfolio!
Happy trade hunting…
Andy Hecht
Editor, Trade Hunter & Commodity Trend Alert
Commodity Prices Generally Lower Ahead of Non-farm Payrolls
World markets generally head lower ahead of release of US non-farm payrolls. WTI crude oil slides for a 3rd consecutive day as investors worry that poor employment data may signal delay in economic recovery. Currently trading at 75.7, the benchmark contract in crude oil has moved towards the lower end of recent trading range of 72-82.
Consensus forecast non-farm payrolls in the US fell -114K in November following a huge drop of -190K in the previous month. Unemployment rate probably stayed at 10.2%. Most of market participants believed that October’s decline in payrolls was somehow too much and pullback this month is justified. Moreover, apart from positive jobless claims data released in recent weeks, seasonal adjustment might have also driven payrolls higher.
That said, an improvement is not certain. In fact, readings of some employment surveys were mixed. ISM manufacturing declined from its recent peak of 55.7 in October to 53.6 in November but employment component stayed above 50 for the second consecutive week. However, the major concern came from the services sector. Released Thursday, ISM non-manufacturing index slipped back into contraction territory and the employment component, at 41.6, remained poor.
Gold price also retreats after surging for 5 days and making a fresh high of 1227.5. Near-term overbought condition and broad-based decline in the commodity sector trigger the selloff. The benchmark contract currently trades at 1207 after sliding to 1201.4.
Stock markets also move lower. In Asia, the MSCI Asia Pacific Index lost -0.3%. In Australia, the S&P/ASX 200 Index dropped -1.5% which the NZX 50 Index in New Zealand slid -0.2%. In Japan, the Nikkei 225 Stock Average gained +0.5% as Prime Minister Yukio Hatoyama is expected to announce some new stimulus measures today.
In European morning, UK’s FTSE 100 Index slides -0.65 to 5279. Shares in Germany and France also plunge with both of DAX and CAC 40 Indices falling -0.5%.
This Commodity is Poised to Outshine Gold
Gold has been grabbing all the headlines lately as the price for the precious metal has hit record highs.
In the weeks and months to come, however, you’re going to be hearing about a far more pedestrian commodity: Rice.
The price of rice has started to climb based on reports that both India and the Philippines are looking to import record quantities. India lost 18% of its rice crop to drought this year. For the first time in more than 20 years, it may have to become a net importer of rice.
While drought plagued India, the Philippines had the opposite problem: Too much rain. The country lost an estimated 1.3 million metric tons of rice — at least 8% of the domestic supply for this rice-importing nation — in a series of strong typhoons that hit the region during the past three months.
Along with most commodities, rice hit record prices last year, with the futures markets hitting a peak of $25.07 per 100 pounds in April. And, also like most commodities, the price of rice tumbled as the global recession unfolded. But even though the price of almost every other commodity has been rebounding, boosted by a weaker U.S. dollar, the price of rice has been flat-lining at $13.50.
Until recently.
In the past few weeks, India and the Philippines started to buy rice in the world market. Rice futures have started to climb as a result, up roughly +15% in the past three weeks.
Some analysts have argued that the price of rice could double from here. Others argue that this year’s healthier crops produced stockpiles in Thailand and Vietnam that could help mitigate at least part of any price increase. But one of the biggest unknowns going into a period of potentially higher rice prices…
… is panic.
Last year’s record rice prices started a wave of civil unrest. Rice prices also started panic-driven hoarding. Bulk retailers like Wal-Mart’s (NYSE: WMT) Sam’s Club and Costco (Nasdaq: COST) began rationing rice in an attempt to keep it on their shelves. If the market starts to catch even a whiff of panic in the air, the price of rice could skyrocket.
Unless you dabble in the futures market, there’s no real pure rice play for American investors. When rice hit record prices last year, investors wondered why there was no rice-based exchange-traded fund (ETF). More than a year later, they are still wondering why one of the world’s largest crops still lacks an investment vehicle of its own.
Some investors are using general agriculture ETFs like PowerShares DB Agriculture (NYSE: DBA) and iPath DJ-AIG Agriculture Sub-Index (NYSE: JJA) as proxies for rice. But neither of these funds has an interest in rice. Elements/Rogers International Commodity Agriculture (NYSE: RJA) is one of the only funds that does have rice as a holding, but only a meager 1.43% of the portfolio. Still, it’s more rice than you’ll find in any other exchange-traded product.
But I find myself thinking back to when crude oil prices were coming off their lows.
Instead of consumers hoarding oil, we had cases of institutional hoarding. Speculators and investment houses started buying up oil on the cheap and storing it, hoping to sell it for a higher price in the future. If this starts to happen with rice, a company with grain storage capacity, like Archer Daniels Midland (NYSE: ADM) may be the beneficiary.
ADM has rebounded +44.2% in the last year, although it’s still -33% off its April 2008 high. And with a forward P/E of roughly 11.5 and a PEG ratio less than 1.2, ADM may be a better value bet on rising rice prices than any of the alternatives.
Amy Calistri
Editor
StreetAuthority’s Stock of the Month
Investors Take Profits After Relentless Rallies in Commodities
Crude oil price continues hovering at year-high level in European morning as the market awaits the inventory report. Apart from this report, there’s not much industry-specific data that investors can rely on this week. On the macro front, focus of today is inflation data from the Eurozone and the US. Moreover, regional manufacturing in the US should also trigger market sentiment which will decide oil price’s direction in the near-term.
Released earlier, Eurozone’s CPI moderated more rapidly than anticipated in September. The reading came in flat on monthly basis after rising +0.3% in August. The market had expected a gain of +0.1%. On annual basis, the headline reading contracted -0.3% while the core CPI was stickier and increased +1.2%. In the US, analysts forecast CPI would have risen +0.2% mom in September after surging +0.4% a month ago. On annual basis, contraction should have slowed to -1.4% following a decline of -1.5% in August. CPI is a barometer that investors have been monitoring as its outlook determines the Fed’s monetary policy.
The Empire manufacturing index probably fell to 17.75 in October after soaring to23-month high at 18.88 in the previous month. At the same time, the Philly Fed index might have dropped to 12 after rising 10 points to 14.1 in September. The regional manufacturing surveys will give important indication on how the ISM index moves from September’s level of 52.6.
Gold plunges to 1052 in European morning as investors take profits after the yellow metal rallying +9% in the past 2 weeks. Other precious metals also decline in sympathy. Silver falls -2.2% to 17.5 while platinum pares gains in the past 2 days and currently trades -1.2% lower at 1351.
Silver, which outperformed gold in recent rise, may undergo deeper correction as its fundamental outlook is not at all brilliant. Yesterday, both Rio Tinto and Fresnillo reported rise in silver supply in 3Q09. Rio Tinto said that its silver output rose +39% yoy in the third quarter to 2.12M oz while Fresnillo reported that its production in the white metal increased +7% yoy and +1% qoq to 9.6M oz. Although there are potential strike in Peru (the world’s largest producer in silver), it will be unlikely to eliminate supply surplus this year unless industrial demand picks up rigorously.
Stock market strengthens amid speculations on favorable earnings results. In Asia, the MSCI Asia Pacific Index climbed +0.6% as Japan’s Nikkei 225 Stock Average rose +1.8% to 10238.7 after Elpida memory posted the first operating profit in 8 quarters. Moreover, Credit Suisse recommended buying Panasonic Corp. Other indices such as Australia’s S&P/ASX 200 Index and South Korea’s Kospi Index also gained +0.6%. In Europe, benchmark indices fluctuate between gains and losses. In the US session, Goldman Sachs and Citigroup will report 3Q09 earnings.
Sentiment Returns and Commodities Surge
Crude oil price rallied to a 7-week high at 73.84 Monday as driven by strong equity market and weak USD. While market sentiment once again pushed oil closer to the key resistance of 75, stagnant fundamentals in energy market refrained price from an upside break. The benchmark contract eventually settled at 73.27, gaining +0.7% from last Friday’s close.
For fuel products, heating oil jumped +2.2% to a 7-week high as US Climate Prediction Centre forecasts temperatures in the Northeast and Midwest will drop below normal between October 15 and October 25. Investors anticipated a colder weather should spur higher consumption in heating oil. As lead by strength in the energy complex, RBOB gasoline also climbed +1.8%.
Gold price pared Friday’s loss and rebounded +0.8% to 1057.5 yesterday with the decline in USD remaining the major driving force. Silver surged to almost a 3-month high at 17.955 before closing the day +0.7% higher at 17.82 while platinum added +0.6% to close at 1347.3.
Stocks in US strengthened with Dow Jones Industrial Average gaining +0.2% to 9885.8 and S&P 500 Average adding +0.4% to 1076.2, the highest in a year. Investors were excited as Black & Decker Corp upgraded its 3Q09 earning forecast and Ford Motors said its auto sales in Europe rose +12% in September.
USD weakened against major currencies except for Japanese yen and British pound. The dollar index fell to 76.12. Against higher-yield currencies such as the euro, Australian dollar and New Zealand dollar, USD dropped to 1.48, 0.908 and 0.736 respectively after a brief recovery last Friday. British pound weakened against the dollar and the euro as the Center for Economic and Business Research said the nation’s interest rate should stay at a record low of 0.5% at least until 2011. At the same time, the British Chambers of Commerce said that the BOE should extend its bond purchase program by 25B pound to 200B pound next month so as to support economic recovery. Currently trading at 5-month low against the dollar and 6-month low against the euro, the pound will stay under pressure for some time.
Today in Asia, commodity prices change little as the market awaits more data both from the macro and industry side. Stocks rally with the MSCI Asia Pacific Index soaring +0.5%. In Japan, Nikkei 225 Stock Average gains +1% to 10114 as Japan’s exports should benefit from weakness in yen. Retail sales in New Zealand surprisingly increased +1.1% mom in August, compared with consensus of a +0.6%gain, from a drop of -0.5% in the prior month. Excluding auto, the reading surged +1.2% during the month. The better-than-expected data should increase speculations that the RBNZ will increase its policy rate earlier than previous estimated. Currently, the market is pricing in a move in January 2010.
Source: OilnGold
Commodities Edge Higher on a Quiet Day
Crude oil rises to 72.15 in Asia Monday. However, trading volume is thin as Japan, US and Canada markets are closed on holidays today. Last Friday, Dow Jones Industrial Average climbed +4% to 9684.94 and S&P 500 rose +4.5% to 1071.49. Rallies in stock indices to 1-year high spurs interest in oil markets as investors anticipate recovery in energy market consumption.
Despite the improved sentiment, crude oil price will continue to gyrate within recent trading of 65-75 until concrete evidence of demand recovery is seen. Over the weekend, Kuwait’s oil minister Sheikh Ahmad al-Abdullah al-Sabah said that ‘oil prices between 60 and 80 are suitable for exporters and importers’. Judging from outcomes from recent OPEC meetings and comments from member countries, OPEC seems to be satisfied with current price level. The likelihood for further output cut is low in coming few months. In fact, rising spare capacity and rise in oil price have triggered some members to produce more than their quotas. The International Energy Agency estimated OPEC’s compliance has fallen to 62% in September, compared with 66% in August and over 80% in the first quarter.
Gold price has little change after plummeting -0.7% last Friday. Although currently recovers to 1051, the yellow metal may still have risk to decline on long liquidation and USD’s technical rebound. However, gold should resume its uptrend after consolidation. Global central banks’ diversification away from the dollar is expected to pressure USD further. At the same time, diversification would increase central bank’s purchase of gold.
Commitments of Traders
- Crude Oil: Net speculative long positions rebounded to 50006 contracts last week as oil price recovered. While staying below the peak of 62216 contracts 2 weeks ago, net longs in crude oil continued to hover around high level in 2009, suggesting traders were not much affected by stricter CFTC regulations
- Natural Gas: Net shorts contracted for the second consecutive week. Gas price has rebounded strongly in recent weeks but we worry that high gas price would delay demand recovery. Record high gas storage should continue pressure on the cash market which in turn forces the futures market to move lower
- Gold: Net speculative long positions reached record high of 239668 contracts. At long positions have become more stretched, we feel it more necessary for gold price to correct
- Silver: Net speculative long positions pulled back after rising for 7 weeks. Recent rally in silver have been simply an amplification of gold’s rise. Similar to gold, silver is prone to a correction before resuming the uptrend
- Platinum: Net long positions recovered to 17955 contracts
Source: Oil n Gold
Weekly Fundamental Outlook for Energies and Metals – Industry Experts Raised Demand Outlook on Oil
After the RBA’s rate hike at the October meeting, biggest topic in the market has been ‘who’s the next central bank in the developed world to tighten monetary policy?’. While analysts have diverse opinions on which of RBNZ, BOE, ECB and BOC will be the next candidate, the majority anticipates the Fed to keep its unprecedentedly low policy rate at 0-0.25% until 2Q10 and BOJ’s 0.1% rate will stay even longer.
Interest rate differential continued to pressure USD. The dollar index plummeted to 14-month low at 75.996 Thursday before rebounding as investors took Fed Chairman Ben Bernanke’s speech as hawkish. The dollar index declined -0.7% on weekly basis. Weakness in USD drove demand for commodities and the Reuters/Jefferies CRB Index surged +3.8% to close at 262.55.
Crude Oil
Crude oil price was under pressure amid USD’s rebound earlier in the day. However, price pared losses after the International Energy Agency (IEA) upgraded the demand outlook for 2010 for a third consecutive month. The benchmark contract eventually settled at 71.77, adding +2.6% on weekly basis.
The US Energy Department (EIA) and the International Energy Agency released monthly reports last week. Both agencies revised upward their outlooks on world oil consumptions amid improvement in macroeconomic outlook.
The US Energy Department forecast crude demand will increase to 84.77M bpd in 2010 after a drop to 83.67M bpd in 2009. The 2010 forecast was +0.18M bpd above the projection made in September. However, the Department did not change the forecast on WTI crude oil price which remains to be 75/bbl by December 2010.
The International Energy Agency anticipated global oil consumption would rise to 86.1M bpd in 2010, +1.7% yoy as driven by +3.6% demand growth in developing countries while ‘demand from the world’s developed economies is expected to remain stagnant in 2010 after falling -4.5% this year’. The estimate was +0.35M bpd higher than the projection made in September. IEA also upgraded its 2009 consumption forecast to 84.6M bpd, -1.9% yoy. In September, the agency anticipated the demand will drop -2.2% on annual basis.
2 weeks ago, a meeting was carried out between permanent members of the UN Security Council and Germany, and Iran regarding Iran’s nuclear program. Unexpectedly, the meeting was ‘peaceful’ and the progress was better than expected. Iran agreed to let the International Atomic Energy Agency (IAEA) visit the Qum site on October 25. Moreover, Iran agreed to send most of the LEU stockpiles to Russia for further enrichment and then to France for medical research purposes. The deed aims at lowering Iran’s LEU level to what is required for making nuclear weapons.
The geopolitical tension between Iran and the world did boost oil buying. However, how serious is its impact on oil supply and price? In our view, the disruption on oil production is not that severe and the therefore, the impact on oil price is not too much.
Take the invasion of Iraq in 2003 as an example. In Iraq, oil production dropped -36% yoy to 1.34M bpd in 2003. However, oil production in the country had been falling -16% yoy to 2.12M bpd in 2002 and -4% yoy 2.52M bpd in 2001 after making a 20-year of 2.61M bpd in 2000. More importantly, crude production rapidly recovered +50% to 2M bpd in 2004.Concerning oil price, WTI crude rose +6% a week after the war began. However, the rally slowed down and eventually reversed to a fall of -12% in less than 2 months’ time.
Natural Gas
Natural gas price dropped -3.9% to settle at 4.77 Friday. Although the benchmark contract gained +1.1% on weekly basis, outlook remains uncertain and gas price should continue to trade with high volatility.
The US Energy Department forecast that total natural gas consumption will drop -2% in 2009 and -0.2% 2010. There compare to the estimates of a decline of -2.4% in 2009 and 0% in 2010. According to the Department, ‘weak economic conditions continue to hamper the industrial sector, where the most recent data show natural gas consumption is down by -12.4% through July compared with the same period last year. With lower consumption in the residential and commercial sectors as well, natural gas use in the electric power sector continues to serve as the only demand outlet for increased natural gas supplies’.
Natural gas has rebounded strongly in recent weeks. However, we believe price should remain at low level for some more time so as to improve the fundamentals.
US gas storage increased +69 bcf to 3658 bcf in the week ended October 2. The level is +15% above 5-year average. Although the number of gas rigs has dropped more than -50% from its peak in September 2008, recent data form Baker Hughes’s data showed building of rigs over the past few weeks. We believe drilling activities pick up because of rise in gas prices.
On the demand side, the EIA stated that ‘electric power sector continues to serve as the only demand outlet for increased natural gas supplies’. However, further increase in gas price suggests that gas will lose its place to coal and the last resort for the abundant gas storage will disappear. Therefore, we’d prefer gas price to fall more in coming month so that the demand/supply outlook can be rebalanced.
Precious Metals
Comex gold halted the 5-day rally by retreating -0.7% Friday. Settling at 1048.6, the December contract surged +4.4% over the week. Last week’s rally was impressive as gold has broke above the peak made in March 2008 after trading below it for one and a half years. The breach was decisive and price closed above it over the past 4 days.
The retreat last Friday was driven by USD’s strength amid speculations that the Fed will increase interest rate sooner than previously anticipated after Chairman Ben Bernanke’s speech. Investors probably seek more evidence about economic recovery after the RBA hiked its policy rate earlier in the week. In fact, Bernanke’s stance has not changed from what he said in WSJ in July. Meanwhile, a pullback or consolidation in gold price is warranted due to long liquidation. However, we remain bullish on gold price in the long term.
Major reasons driving gold’s rally are weak USD, inflation expectations and minimal sales from central banks.
The Fed has reduced the policy rate to 0-0.25% since late 2008, making it one of the countries offering the lowest funding rates. Last month, USD ‘took over’ Japanese yen as the funding currency for carry trades as the LIBOR rate for USD has dropped below than of yen. G-17′s non-intervening approach to USD’s depreciation and RBA’s beginning of the tightening cycle put further pressure on the greenback and the dollar index will likely resume its long-term downtrend soon.
Although global central banks have been emphasizing that inflation outlook is subdued, investors do not seem to hold the same view. US’ University of Michigan survey showed that consumers anticipated inflation will reach +2.2% in a year, significantly above the current level while UK’s inflation attitude survey by the BOE showed that consumers expected inflation to reach +2.4% in a year.
While IMF’s sales of 403 metric tons gold in coming years does remain as an overhang to gold price, we do not believe it will have any material impact to gold price. As we mentioned before, the sales will be carried out in 4-5 years at market price and the IMF will ensure it will not cause fluctuation in the gold market. IMF’s gold sales will be compensated by gold buying in central banks. Given the huge budget deficits in the US, global central banks have been diversifying away from USD. By August 19, gold sales under CBGA II were 149 metric tons, compared with 358.3 metric tons in 2007/08 and 475.8 metric tons in 2006/07.
Among the above drivers, USD’s weakness is the most prominent one is pushing gold high. In the chart below, the regression line for September data has higher slope than the one for June- August data. This suggests the dollar impact on gold has been stronger than before.
Silver amplified gold’s rally and became the best performer in the precious metal complex last week. In fact, silver price rallied +65% since the beginning of 2009, compared with +21% in gold. Certainly, it was to a large extent a catch-up play as silver plunged -26% while gold gained modestly in 2008. Although gold price has broken its 2008-high, silver, after the +9% rally last week, remained -17% below its record level.
Investor Jim Roger said that silver should have better growth prospect than gold in the precious metal complex as industrial demand on these metals will increase as global economy recovers.
At the end of 2008, gold-to-silver price rose above 80 as silver price plummeted. Recently, the ratio has fallen to around 60. We believe the ratio lies at a fair level now. However, as both gold and silver rallies have been driven by robust investment demands, deeper correction will probably be seen in silver than in gold as positioning in the former is more stretched.
Base Metals
The complex rebounded strongly last week as driven by falling USD, strong equity market as well as some industry specific good news. Alcoa, the largest US aluminum producer, surprisingly reported profits of $77M in 3Q09. Although the figure represented a decline of -33% from the same period last year, it exceeded market expectation of a loss. Concerning demand outlook, the company said the end-market has started to stabilize and demand is improving. Potential production disruptions also helped boost metal prices. BHP, the world’s largest miner has been facing potential strike as its Chilean copper mine as workers demanded for a wage raise. Over 20% of copper-mine output will be affected in 3-6 months.
China will release the preliminary trade data for September and we should see further decline in imports. This remains an overhang for base metal prices in the near-term.
Source: Oil n Gold
Commodities Strengthen as USD Slides
Crude oil price hovers around 70 in European morning as weakness in USD boosts demand for commodities.
Stock markets continue to advance after RBA’s rate hike Tuesday as this signaled economic recovery. In Asia, the MSCI Asia Pacific Index gained +1.2% while Japan’s Nikkei 225 Stock Average climbed +0.3% to 9832. In Australia, S&P/ASX 200 Index rose +1.6% to the highest level in a year as the number of employment surprisingly surged 40.6K in September after a decline of 24.6K in the previous month. The market had anticipated another month of drop by -9.7K.
In Europe, equity markets extend strength. UK’s FTSE 100 pares gain and is rising less than +1% after the Bank of England announced to keep the policy rate at 0.5% and the asset purchase program at 175B pounds. Although the decision came as expected, the statement that the scale of the program would ‘be kept under review’ added uncertainty to the outlook.
At the ECB meeting, which was held in Venice, the Governing Council of the ECB decided to keep its main refinancing rate for a 6th consecutive month at 1%, while the interest rates on the marginal lending facility and the deposit facility also stayed at 1.75% and 0.25% respectively. A press conference will be held at 1230 GMT.
While it’s also widely anticipated the policy rate will stay at 1% today and for an extended period of time as general price level remains subdued, recent rally in gold price has triggered attention the inflation outlook.
Gold price strengthens to as high as 1059.6 in European morning. The following chart showing inflation expectation has been rising in the Eurozone. At the same time, correlation between gold price and inflation expectation has increased significantly since April 2009. Will recent rally in gold price, as an implication to higher inflation expectation, trigger a more hawkish stance in ECB in coming meetings? We believe this is probable.
Others in the precious metal complex also rally with silver soaring +1.9% to 17.83, the highest level in 14 months. Platinum also jumps +1.4% to 1346.
RBA’s Tightening Boosts Sentiment. Investors Seek Risks Again
Commodities rally in European morning as RBA’s surprising rate hike suggested global economic recovery is on the way. WTI crude oil price surges to 71.15 while gold price rallies to as high as 1029, only $5 below the 1033.9 high made on March 2008.
At the October meeting, the RBA announced to raise its policy rate by 25 bps to 3.25% as global economy is resuming growth. According to the accompanying statement, ‘the recovery will likely continue during 2010 and forecasts are being revised higher. The expansion is generally expected to be modest in the major countries, due to the continuing legacy of the financial crisis. Prospects for Australia’s Asian trading partners appear to be noticeably better. Growth in China has been very strong, which is having a significant impact on other economies in the region and on commodity markets. For Australia’s trading partner group, growth in 2010 is likely to be close to trend’.
Stock markets also strengthen across the board. In Asia, the MSCI Asia Pacific Index gained +1.4% after falling for 3 days. Japan’s Nikkei 225 Stock Average added +0.2% while Hong Kong’s Hang Seng Index rose +1.9%. Rise in Australia’s S&P/500 200 Index shrank as rate hike will increase the borrowing costs of corporations.
In European morning, UK’s FTSE 100 Index and France’s CAC 40 surge +1.5% to 5099 and 3729 respectively while Germany’s DAX Index adds +1.64% to 5599. Good signs from Australia shadowed weak economic data in the region. UK’s industrial production declined -2.5% mom in August after rising +0.5% in the previous month. In Switzerland, CPI stayed flat in September, following modest gain of +0.1% a month ago.
Saudi Arabia’s central bank denied the news that it has been discussing with China and other countries regarding trading oil using a basket of currencies. Governor Muhammad al-Jasser said that the news is ‘absolutely incorrect and there’s ‘absolutely nothing’ regarding the issue was being discussed.
3 straight days of rally has not only sent the Comex gold futures +2.6% higher, but also helped it made a fresh 18-month high today. As commodities have gathered strong trading momentum these 2 days, it’s likely for the yellow metal to break the record high level of 1033.9 soon.
Investment demand in gold stays robust. Bullion holdings in SPDR Gold Trust have risen for 3 consecutive days to 35.3M oz. This represented an increase of +1.9% from a month ago and +47.5% from a year ago.
