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 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

Commodities Under Pressure as USD Rebounds and Pace of Recovery May Slow

Crude oil price remains under pressure in European morning on stock markets’ decline and USD’s rebound. As recent price rallies have brought risky assets’ valuations to stretched levels, investors have become extremely vulnerable to bad economic news and trade restrictions between China and the US immediately triggered worries about recovery.

Inline with the Asian market, stocks open lower in Europe with UK’s FTSE 100 Index sliding -0.7% to 4977. Germany’s DAX and France’s CAC 40 also drop -0.9% and -1% to 5575 and 3698 respectively. Economic data released in the region was largely as market anticipations. Industrial production in the Eurozone contracted -0.3% mom in Jul following a -0.2% decline in the previous month. On annual basis, the gauge declined -15.9%, slightly better than consensus of -16.7%. While continued to fall, fall of employment in the 16-nation region moderated to -0.2% qoq in2Q09 compared a -0.8% decline in the prior quarter.

Earlier in Asia, the MSCI Asia Pacific Index plunged -1.8% after making a 1-year high last week. Japan’s Nikkei 225 Stock Average lost -2.3% to settle at 10202. Strength in Japanese yen spurred concerns about the nation’s recovery. In China, the Shanghai Composite Index gained +1.2% to 3027 as led by the +10% rally of Shandong Minhe Animal Husbandry after China announced investigation of US’ chicken imports.

The dollar rebounds against major currencies after last week’s severe selloff. Against the euro, USD recovered to 1.454 from a 9-month low. After surging for several months, euro’s valuation looks stretched and a near-term correction will likely be seen.

Several Fed officials, Duke, Lacker and Yellen, will speak about financial regulations and economic outlook, While we believe main themes will remain largely the same as what the Fed said during the FOMC in September: better economic outlook but recovery will be gradual and uncertain, expansionary monetary policies should remain for some more time. Any change in tones, either more bullish or bearish, will move the currency and hence commodity prices.

Gold price falls below 1000 while silver also plunges -1.6% to 16.4 as USD strengthens. For gold, investment demand has been the crucial price driver as physical demand remains sluggish since the beginning of the year. We will monitor to see if there’re capitals flowing out of the gold ETFs and/or futures after weeks of inflows. Should this be the case, investors should take profits from their long positions first.