Fundamentals, Oil & Gold

Gold Rallies to a Fresh Record High after a Sharp Jump in US Unemployment

North American Commodity Update

Commodities – Energy

A Jump in US Unemployment Cripples Demand Forecasts for Fuel, Sends Oil Tumbling

Crude Oil (WTI) -  $77.64  //  -$1.98 //  -2.49%

The US employment statistics didn’t produce the reaction that many had expected for the dollar or equities. Both would see a spike in volatility immediately after the release; but the impact would quickly temper as the early morning trading hours progressed. For crude on the other hand, the reaction was immediate and straightforward. Weighing demand concerns, the commodity fell 2.7 percent in the drive sparked by the key release.  From session high to session low, the market tumbled 4.5 percent, which fit very comfortably within the broad congestion channel that has developed since the market peaked back on November 21st. This clearly definable trading zone will act to stabilize and anchor price action (much like the pattern through the first three weeks of October); and that means the burden for developing a new trend will be that much more difficult.

Taking note of the slight, bearish drift that has developed over the past two weeks; we could be looking at either a period of consolidation before the dominant trend is revived or the beginnings of a meaningful reversal. Throughout the September/October advance, fundamentals were consistently fighting the reason in the steady advance. Despite the sharp drop in inventories reported by the Department of Energy this past week, stockpiles are still seven percent above average for the season. On the other side of that equation, demand has not risen to balance the glut in inventories. The DoE reported this past week that demand in the four week through October 30th was 4.5 percent below the levels from last year. What’s more, with today’s labor data, the outlook for fuel consumption is looking even more anemic. With the unemployment rate at a 26 year high 10.2 percent (not far from the record high 10.8 percent set back in 1982), consumers will purchase much less heating oil and gasoline. Furthermore, the subsequent restraint on spending will generally hobble a meaningful recovery. Shifting from natural supply and demand to speculative interests; the CFTC’s Commitment of Traders report would also show today that net speculative positions rose to 109,619 contracts through this past Tuesday – the highest since March of 2008.

Commodities – Metals

Gold Rallies to a Fresh Record High after a Sharp Jump in US Unemployment

Spot Gold  -  $1095.10 //  $4.80  //  0.44%

Gold would seemingly defy both the general pace of risk appetite and logic Friday after the release of October’s non-farm payrolls. In the past weeks and months, the precious metal has developed a significant, positive correlation to the Dow Jones Industrial Average and other equity benchmarks. However, whereas stocks would initially plunge and eventually stabilize after the market-moving data crossed the wires; spot gold would actually rally to a new record high just above $1,100 an ounce. This dichotomy seems to defy fundamental reason as the commodity has acted predominately as a speculative asset for the past through much of this year’s bullish revival; but gold actually has three unique roles that have each guided price action in the recent past: speculative asset; inflation hedge and safe haven. Just as the dollar stepped up as a safe haven for the FX market after the release, gold would play its part for the macro sector.

Yet as this pricey metal climbs steadily to new record highs, the viability of this security representing a cost-effective inflation hedge, a reasonable trade or stable harbor for capital diminishes. At these heights, expectations for upside progress are far more reserved than the likelihood of a deep reversal on a speculatively-driven bout of profit taking. From the traders perspective, the COT numbers released today reported speculative interest contracted to a net long of 241,319 contracts. Open interest now totals 493,991 contracts. Elsewhere, SPDR Gold Trust reported its holdings were unchanged at 1,108.4 tons while ETF Securities reported a 1.4 percent drop in its own stores to 7.838 million ounces.

Spot Silver  -  $17.385  //  -$0.02  //  -0.11%

Price action for silver would more closely resemble equities than it would gold. Despite the painful rise in US unemployment, silver traders thought the event would have little impact on demand for this metal – even with its ties to underlying sentiment trends. The session would ultimately end with little change; and spot silver would mark neither a fresh high nor low for the week. Measuring speculative interests, non-commercial positioning fell significantly for a second week. Net long interest dropped 10 percent to 39,798 contracts. At the same time, the iShares Silver fund (the largest silver-backed ETF) reported holdings were unchanged through Thursday at 8,740.15 tons (this follows a modest 3.85 ton decline the previous day and 131.43 jump the previous Thursday).

Written by John Kicklighter, Strategist
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