Alan's Finance Blog

Gold Rallies to New 2010-High as Investors Doubt Effectiveness of the Bailout Plan

Comex gold price rallies to a new 2010-high at 1219.4, one more step closer to record high of 1227.5 made in December, as fears over sovereign crisis resurfaces. Moody’s said it may cut Greece’s rating to ‘junk’ in the coming month amid ‘dismal’ economic prospect. Silver also grinds higher to 18.6 while PGMs reverse gains.

Risk assets’ massive relief rally loses steam as investors worry that the stability package may not be sufficient to contain European sovereign crisis. Market sentiment is further dampened after receiving strong Chinese inflation data as it signals more tightening. WTI crude oil price plunges to 75.6 in European session while Brent crude falls below 80 again.

Growth in China remained robust in April. Although industrial production missed market expectations and expanded +17.8% y/y, CPI soared +2.8% y/y, the fastest pace in 8 months. Despite the government’s policy to curb lending, property prices rose +12.8% y/y while new lending also exceeded consensus and reached RMB 774B.

While the Chinese government aims to keep inflation at 3%, recent data shows that it’s hard for this target to be achieved. Escalated inflationary pressure indicates more tightening measures are needed. It’s likely the government will resume RMB appreciation soon, probably in June.

Crude oil imports rose to 21.17M tons in April. With exports remained sluggish, net imports reached a record high of 20.98M tons during the month. However, there are concerns that demand will slowdown as China accelerates tightening.

In its monthly report, OPEC upgraded its global demand forecast modestly. The organization controlling 40% of oil in the world expects demand will rise to 85.38M bpd in 2010 from 84.4M bpd last year. This was slightly higher than last month’s forecast of 85.2M bpd. According to OPEC, China has been among the main drivers behind oil demand growth so far this year, which should continue for the rest of the year. On the supply side, non-OPEC supply will rise to 51.7M bpd, compared with 81.53M bpd projected in April. This signals less oil is needed from OPEC.

Demand/supply in oil market is again in focus and analysts anticipate US crude inventory rose +1.1 mmb in the week ended May 7 with Cushing stocks surging for another week. Gasoline and distillate stockpiles probably climbed +0.8 mmb and +1.3 mmb, respectively. American Petroleum Institute will release its estimates after market close today.

Source: Oil n Gold

Gold Tumbles as China is Uninterested in IMF’s Sales

Crude oil price continues sliding in European morning with the front-month contract extending weakness to 78.3, after a -1.8% Tuesday. Investors remain worried about the unexpected decline in US consumer confidence.

After of Bernanke’s Testimony, the data in focus is Eurozone’s industrial new orders which rose +0.8% m/m in December, compared with a contraction of -1% as forecast by the market. On annual basis, the reading expanded +9.5% following a -0.6% decline in November. In Germany, Gfk consumer confidence slid to 3.2 (consensus: 3) in March from an upwardly revised 3.3 in February.

The slightly stronger-than-expected data help recouping some of the losses the European stock markets incurred earlier in the day. Given the strong direct correlation between stock market and oil, we expect this should give some support to oil price.

The euro also recovers modestly against USD, although it stays at a 9-month low. The rebound is probably due to market expectation that Fed Chairman Ben Bernanke will reiterate the central bank’s accommodative monetary stance in the congressional testimony. Bernanke will likely restate that the Fed will keep the policy rate at 0-0.25% for an ‘extended period’.

A newspaper in China reported that an official from the China Gold Association said the county is unlikely to buy gold from IMF. ‘It’s not feasible for China buy the IMF bullion, as any purchase or even intent to do so would trigger market speculation and volatility’. Rather, the official stated China will increase gold reserves by acquiring gold mines abroad.

The news is disappointing as the market had hoped some central banks or official sectors will absorb IMF’s remaining gold sales of 191.3 metric tons.

Gold price plunges with the benchmark contract breaking below near-term support at 1100. Currently trading at 1190.5, the yellow metal has fallen for a 3th consecutive day.

Source: Oil n Gold Report

Crude Rebounds as Strong European PMIs Halt USD’s Rally

Crude oil rebounds to 73.2 in European morning in tandem with the equity market as strong manufacturing PMI readings in European countries boosted sentiment and buying interest in the Euro. The White House’s spending plan which will increase the country’s deficit to $1.6 trillion made investors worry about USD. Moreover, cancellation in ceasefire in Nigeria raised concerns about supply disruption in the region. However, we believe these triggers will only have short-term impact.

Major European countries reported better-than-expected PMI for January. In Switzerland, the SVME-PMI improved to 56 in January (consensus: 55.4) from 53.7 a month ago. In the Eurozone, the PMI is revised up to 52.4 in January from flashing reading of 52. Both the euro and the Swiss franc rebound against USD after tumbling last week. Unfortunately, the pound’s slump continue despite an unexpected improvement in PMI to 56.7. The market had anticipated a retreat to 53.9 from 54.6 in December. Sterling dives to a 1-month low of 1.585 against the dollar as the market forecasts the BOE will announce to pause the asset purchase program even the UK economy remains fragile.

Today, the US will release the budget plan which likely shows the nation’s budget deficit will reach a record of $1.6 trillion in the fiscal year ending September 30 before reducing to $1.3 trillion in fiscal year 2011. In order to stimulus economic growth and create job opportunities, the government will be spending $3.8 trillion.

In 2009, USD was under heavy selling pressure because the country printed money as a means to stimulate growth. Investors even speculated the euro or a basket of currencies would be replacing the dollar as the dominant reserve currency. However, such speculation diminished recently, especially the Greek fiscal problem caused dumping in the euro.

Last week, MEND, the main militant group in Niger River delta declared to end ceasefire and resume attack in the region’s oil facilities as the government failed consider the group’s demand for ‘the control of its resources and land’. The Niger delta has been facing militant attacks since 2006. Between 2006 and 2009, the country’s oil production has been reduced -25%.

Gold price changes little in European morning although USD halts its rally. Within the precious metal complex, gold has probably lost its appeal to platinum and palladium. For gold price to rally strongly, we may need to see more news about central banks buying the yellow metal and rising inflationary pressure.

Platinum and palladium hold above last week’s lows and rebound. While platinum edges +0.7% to 1519, palladium soars +1.2% to 420.

Source: Oil n Gold

Industry Estimates Showed Huge Decline in Crude Inventory

Crude oil price climbed higher yesterday after the American Petroleum Institute reported huge decline in crude inventory last week. The benchmark contract added +0.3% to close 79.14. In Asian session today, price continues to edge higher but upside momentum decreases as price moves closer to 80.

According to the industry-sponsored API, crude oil inventory drew -4.37 mmb to 333.1 mmb in the week ended November 13. The decline was significantly more market expectation of a drop of -2.2 mmb because attack of Hurricane Ida during the week caused shutdown of 43% of oil production facilities in the Gulf of Mexico. Gasoline stockpile was down -0.93 mmb, compared with consensus of -0.5 mmb, to 210.5 mmb as imports reduced. The disappointment came again from distillate stockpile which rose -0.51 mmb during the week as imports increased while demand slid.

The US Energy Department will deliver its weekly report in US session today. Crude inventory probably climbed +0.3 mmb. Gasoline and distillate stockpiles are anticipated to have dropped -0.025 mmb and -0.85 mmb, respectively.

Speculations on central bank buying and weakness in USD continue to drive investor crazy for gold. After mild consolidation Tuesday (closed at 1139.4, +0%), the yellow metal extends to a fresh record high at 1144.7 in Asian morning today.

The IMF’s sales of gold to the Reserve Bank of India and the central bank of Mauritius signaled more central banks will step up gold purchases. This phenomenon is positive for gold.

USD recovered modestly against major currencies as stock markets eased after US’ inflation, industrial production and housing data missed expectations. The dollar index gained +0.6% yesterday. The US Labor Department reported that PPI rose +0.3% mom while core PPI contracted -0.6% mom in October. Both readings were weaker than market expectations. Industrial production grew +0.1% mom in October while the market had anticipated a +0.4% increase. Worse still, September’s reading was revised down to +0.6%. NAHB housing market index stayed flat at 17 in November, contrary to consensus of an improvement to 19.

If economic data in the US continue to be disappointing, this should lead to weakness in USD in the long-term. Subdued inflationary pressure will allow the Fed to maintain its accommodative monetary policy for a long time.

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

Crude Breaks Above 80 Again As Investors Speculate Pleasant Surprise from Energy Department

Crude oil rises above 80 (intra-day high: 80.23) in European morning. Investors are awaiting the EIA’s inventory report. As the market anticipates modest build in crude oil inventory, a surprising draw could trigger strong buying which may push price above the said intra-day high. However, we doubt if the rally will be sustainable as the inventory draw was to a large extend driven by hurricane Ida, rather than recovery in demand.

Gold extends rally to 1149.5 in European morning as the dollar resumes weakness. USD plummets -0.07% to 1.497 against the Euro ahead of US housing start and CPI data. Investors stay bearish on USD despite ECB President Trichet’s strong-dollar speech. Trichet said yesterday that a strong dollar is in the world’s best interest. Moreover, he denied the euro will be replacing USD as the dominant reserve currency. ‘The euro wasn’t created to compete with the dollar or to be a substitute to the dollar as a reserve currency…The ECB isn’t campaigning for the international use of the euro’.

US CPI probably rose +0.2% mom for the second consecutive month in October as driven by increase in energy prices. However, core CPI should have slowed to +0.1% mom in October from +0.2% a month ago. The soft reading in core CPI was due to weakness in the ‘rent and owners’ equivalent rent’ component. Housing starts are expected to have increased to 599 K units in October from 590K units a month ago.

The Bank of England minutes for November’s meeting revealed that while all members voted for maintaining the policy rate at 0.5%, there were splits regarding adjustment in the asset buying program. Out of the 9 MPC members, 7 favored extending the program by 25B pound. However, Chief Economist Spencer Dale preferred no change while David Miles favored a 40B-pound expansion. According to the minutes, Dale said that ‘further substantial injections of liquidity might result in unwarranted increases in some asset prices that could prove costly to rectify, complicating the task of meeting the inflation target in future’. Miles suggested a bigger expansion because it could ‘provide greater insurance against the downside risks to growth and inflation arising from constrained credit supply. That would maintain a similar rate of purchases as had been the case in the previous three months, once the intended break in the purchase program at the end of December was taken into account’.

Stocks in Europe advance as driven by rallies in commodity shares. In the UK, the FTSE 100 index climbs +0.4% to 5366. Germany’s DAX and France’s CAC 40 surge +0.7% and 0.6% to 5820 and 3583 respectively. Spurred by strength in oil price, BP and Shell adds +0.7% each. Mining shares, Xstrata and BHP Billiton, soar +3% and +2% respectively.

Earlier in Asian session, stocks plunged as investors concerned about capital-raising and share-issuance activities in banking and property sectors. While the MSCI Asia Pacific Index made little change in the day, Japan’s Nikkei 225 Stock Average slid -0.6% to 9677 after developer Tokyo Tatemono announced a plan to sell 45.6B yen in shares, the stock slumped -17%.

Source: Oil’n'Gold

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.

Crude Oil Stays Weak. It’s Correlation with USD Has Surged Substantially

Crude oil price falls below 66 in European morning as USD recovers and stock markets weakens. Currently trading at 65.5, the benchmark contract for crude oil is vulnerable to further decline as investors worry about demand outlook, with distillate consumption the weakest link.

While all of us are familiar with the inverse correlation between gold and USD, the dollar is in fact negatively correlated with all commodities as they are denominated in USD. Although gold traditionally had the strongest relationship with USD, it’s ‘status’ has been overtaken by crude oil in September. This probably suggests crude oil, rather than gold, has greater appeal to investors as they seek higher risk-higher yields. Although gold price has been treated as a financial product, rather than a commodity, weak physical demand and IMF gold sales (although we do not expect significant real impact to price) have posed downside risk to gold’s rally especially when price has approached record high level.

In the weekly report, we mentioned that distillate demand has been very weak despite improvements in economic data. At the same time, given the huge distillate inventory, refiners will delay/ slow down distillate production although we are entering winter. It’s true that distillate demand should remain weak in the near-term. But, how about in the long-term? Will distillate demand catch up with global economic recovery? Yes, we think so.

US imports are critical to distillate demand. In recent months, ‘new orders’ component in ISM survey surged to 55.3 in July and then 64.9 in August. This signaled potential turnaround in the inventory cycle. Should businesses in the US re-stock, there’s potential for distillate demand to pick up again.

Gold price changes little in European morning. Currently trading at 992.5, the yellow metal may halt a 3-day decline last week. However, as gold price had been so strong (having surged for 5 consecutive weeks from mid-August to mid-September) in the past month, further weakness cannot be ruled out and price may hover below 1000 for some time before uptrend resumes.

Stock performance in Europe is mixed. While both UK’s FTSE 100 Index and France’s CAC 40 Index slide -0.1-0.2% in morning session, Germany’s DAX Index edges slightly higher (+0.8%) after Merkel, German Chancellor, won enough votes to form the next government.

In Asia, the MSCI Asia Pacific Index lost -1.6% with Japan’s Nikkei 225 Stock Average plunging -2.5%. In China, the Shangha Composite Index dropped -2.7%.

Source: Oil n Gold Report

Crude Oil Dived Amid Stock Builds – Gold Was Neutral To FOMC’s Statement

Crude oil price fell to as low as 68.04 Wednesday after the US Energy Department reported huge builds in crude and gasoline inventory. The benchmark contract ended the day at 68.97, down -3.9%. Fuel products also got hammered with RBOB gasoline and heating oil losing -4.3% and -2.9% respectively. Natural gas price surged for a second day by +6.9% to 3.86 amid speculations that maintenance in nuclear plant may spur gas demand.

The EIA reported +2.86 mmb increase in crude inventory which Cushing stocks also gained +0.48 mmb. The rise was driven by large stock build in Gulf Coast while modest increases were also seen in the East Coast and Mid West. As anticipated, refinery runs declined sharply, down -1.4% to 85.6%, as refiners find little incentive in production. Crude imports also rose +0.9 mmb to 9.79 mmb while domestic production remained unchanged.

Another disappointment came from gasoline. Inventory surged +5.41 mmb as demand dropped -2.3% to 8.79M bpd, likely due to the end of driving season. Refinery runs have to decline substantially so as to bring inventory to a more reasonable level. As usual, distillate inventory rose, by +2.96 mmb in the reporting week, as demand remained weak.

Natural gas rallied Wednesday despite the broad-based decline in the energy complex. According to the Nuclear Regulatory Commission, 104 nuclear plants in the US will be shut down for maintenance. This was treated as positive news for gas as it’s believed that this will lend support to gas demand. Moreover, Southern Company, the largest US electricity producer in the US, said that it would increase the use of natural gas for power generation by 24% this year as gas price has dropped to favorable level. The US Energy Department will probably show a +66 bcf increase in gas storage to 3527 bcf.

Outcomes of the FOMC meeting were consistent with market expectation. The Fed left its policy rate unchanged at 0-0.25% and slowed down the pace of agency debt and MBS purchase to 1Q2010 from December 2009. Concerning economic outlook, policymakers acknowledged pickups in economic activities and improvements in financial conditions while stressing that consumer spending remained constrained by employment conditions, income growth, housing prices and credit conditions. The Fed remained dovish on the general price level and stated that ‘substantial resource slack likely to continue to dampen cost pressures’.

The dollar’s movement was mixed after Fed’s statement. USD immediately dived to fresh new 1-year low against the euro as stock market rallied after the release. However, buying interests were then seen and the greenback eventually rose +0.4% against the euro, +0.1% against the pound and +0.5% against Australian dollar and Canadian dollar.

Gold plunged to as low as 1007.2 in US morning yesterday as driven by selloff in crude oil price. Price later managed to recover and eventually settle at 1014.4, down -0.1%. We believe the Fed’s statement was neutral to gold. On one hand, slowdown in Fed’s purchase of agency debt and MBS, as well as the Fed’s assurance to monitor the size and composition of its balance sheet and to make adjustments to its credit and liquidity programs as warranted spurred market sentiment and increased investors’ risk appetite. This helped weaken USD and hence support the yellow metal. On the other hand, the Fed’ dovish statement on inflation: ‘with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time’ should have posed downside risks no gold price.