24 May 2012
The investment climate continues to deteriorate, with multiple uncertainties having triggered renewed risk-off sentiment in financial as well as commodity markets. The drivers, to mention a few, are the current Chinese slowdown, recession in Europe and speculation about whether Greece will end up leaving the euro zone. With commodity markets selling off for the past three months, some individual commodities have now reached levels where renewed interest could re-kindle, provided the flow of negative news slows.
A mixed week last week as cyclical commodities like industrial metals and energy continued to look for support, precious metals recovered some lost ground while weather-related concerns triggered a dramatic rally in both corn and wheat. The DJ UBS commodity index finished higher for the first week in three after previously having touched the lowest level since September 2009.
Gold finds support
Just like we witnessed during the previous two corrections, support at the $1,535 to 1,520 level once again held firm, giving money managers the confidence and opportunity to re-enter the market following months of declining interest from especially the leveraged community such as hedge funds.
As of now, the momentum has carried the price back up to the psychological 1,600 level with a break above 1,612 potentially signalling the end of the sell-off that followed the failed attempt to break above 1,800 back in late February. Talk of a Greek exit from the euro zone and a mid-cycle slowdown in the US has once again raised speculation about additional stimulus being provided by the US Federal Reserve. We currently expect the slowdown witnessed in the US as being temporary and unless we see continued weakness in US stocks and job data a third round of quantitative easing seems unlikely.
Gold will, therefore, more have to rely on momentum as the on/off talk about QE3 has frustrated bulls during 2012 and caused increased volatility. A clear technical break back above 1,600 could therefore help bring back leverage players, who make their investment decisions more on technical analysis than solely on fundamentals. Nothing ever goes in a straight line, however, so look for support to be established ahead of 1,565 while a move back below 1,550 raises the risks of a prolonged period of nervousness.
Support for gold can also be found looking at speculative investors positioning. The data covering the week ending May 15 shows that gold net longs are at the lowest levels since December 2008, when the Lehman crisis caused an exodus out of most commodities. Equally important, the level of gross short positions as of May 15 rose to 5.2 million ounces. Such a level of short participation has only been witnessed on six previous occasions during the last decade and has always been followed by a sharp reduction (rally in gold) which could help feed the above mentioned upside momentum.
Crude oil stabilising
Brent and WTI crude both fell for a third week as changed fundamentals have slowly removed worries that demand would challenge the available level of supply. Having witnessed a 17 per cent top to bottom correction on both crude varieties, which in the process has sharply reduced speculators' long positions, attention now turns back towards Iran and their nuclear intentions.
Ahead of a meeting in Baghdad between Iran and Western countries plus China on May 23, the G8 at the weekend reaffirmed its determination to carry through the current sanctions, which have seen Iranian oil supplies to the international market sharply reduced.
The statement opens up for the release of strategic reserves should the sanctions threaten to strain supplies, something that is currently not seen given the strong production levels from Iraq and Saudi Arabia at a time where the global economy is slowing down once again. The geo-political risk premium has been all but removed, considering the current price of Brent crude is some three per cent below the average price during 2011. On that basis and given the reduced long involvement by speculative traders, further downside begins to look limited and some consolidation can be expected ahead of the meeting with Iran with failure likely to increase the risk premium once again.
Rally in wheat
The price of CBOT wheat rallied to the highest level in more than eight months, as the annual focus on weather developments have caused nervousness about the production levels in the US and Russia. Dry weather in key growing regions in the two countries could threaten harvests in two of the world's major exporters of wheat. The strength of the rally has been further assisted by a significant amount of speculative short covering after money managers had built up the biggest short position across all commodities on expectations of a record crop this year.
The investment climate continues to deteriorate, with multiple uncertainties having triggered renewed risk-off sentiment in financial as well as commodity markets. The drivers, to mention a few, are the current Chinese slowdown, recession in Europe and speculation about whether Greece will end up leaving the euro zone. With commodity markets selling off for the past three months, some individual commodities have now reached levels where renewed interest could re-kindle, provided the flow of negative news slows.
A mixed week last week as cyclical commodities like industrial metals and energy continued to look for support, precious metals recovered some lost ground while weather-related concerns triggered a dramatic rally in both corn and wheat. The DJ UBS commodity index finished higher for the first week in three after previously having touched the lowest level since September 2009.
Gold finds support
Just like we witnessed during the previous two corrections, support at the $1,535 to 1,520 level once again held firm, giving money managers the confidence and opportunity to re-enter the market following months of declining interest from especially the leveraged community such as hedge funds.
As of now, the momentum has carried the price back up to the psychological 1,600 level with a break above 1,612 potentially signalling the end of the sell-off that followed the failed attempt to break above 1,800 back in late February. Talk of a Greek exit from the euro zone and a mid-cycle slowdown in the US has once again raised speculation about additional stimulus being provided by the US Federal Reserve. We currently expect the slowdown witnessed in the US as being temporary and unless we see continued weakness in US stocks and job data a third round of quantitative easing seems unlikely.
Gold will, therefore, more have to rely on momentum as the on/off talk about QE3 has frustrated bulls during 2012 and caused increased volatility. A clear technical break back above 1,600 could therefore help bring back leverage players, who make their investment decisions more on technical analysis than solely on fundamentals. Nothing ever goes in a straight line, however, so look for support to be established ahead of 1,565 while a move back below 1,550 raises the risks of a prolonged period of nervousness.
Support for gold can also be found looking at speculative investors positioning. The data covering the week ending May 15 shows that gold net longs are at the lowest levels since December 2008, when the Lehman crisis caused an exodus out of most commodities. Equally important, the level of gross short positions as of May 15 rose to 5.2 million ounces. Such a level of short participation has only been witnessed on six previous occasions during the last decade and has always been followed by a sharp reduction (rally in gold) which could help feed the above mentioned upside momentum.
Crude oil stabilising
Brent and WTI crude both fell for a third week as changed fundamentals have slowly removed worries that demand would challenge the available level of supply. Having witnessed a 17 per cent top to bottom correction on both crude varieties, which in the process has sharply reduced speculators' long positions, attention now turns back towards Iran and their nuclear intentions.
Ahead of a meeting in Baghdad between Iran and Western countries plus China on May 23, the G8 at the weekend reaffirmed its determination to carry through the current sanctions, which have seen Iranian oil supplies to the international market sharply reduced.
The statement opens up for the release of strategic reserves should the sanctions threaten to strain supplies, something that is currently not seen given the strong production levels from Iraq and Saudi Arabia at a time where the global economy is slowing down once again. The geo-political risk premium has been all but removed, considering the current price of Brent crude is some three per cent below the average price during 2011. On that basis and given the reduced long involvement by speculative traders, further downside begins to look limited and some consolidation can be expected ahead of the meeting with Iran with failure likely to increase the risk premium once again.
Rally in wheat
The price of CBOT wheat rallied to the highest level in more than eight months, as the annual focus on weather developments have caused nervousness about the production levels in the US and Russia. Dry weather in key growing regions in the two countries could threaten harvests in two of the world's major exporters of wheat. The strength of the rally has been further assisted by a significant amount of speculative short covering after money managers had built up the biggest short position across all commodities on expectations of a record crop this year.
© Oman Daily Observer 2012
