Fundamentals, Oil & Gold

Gold Surges to a New Record High Just Below $1,200 as the US Dollar Plunges 15-Month Lows

North American Commodity Update

Commodities – Energy

Oil Maintains Its 5-Week Trend Channel as a Dollar Plunge Offsets Weak Inventory Numbers

Crude Oil (WTI) -  $78.08  //  $2.06 //  2.70%

Ever the balance between a seemingly constant glut of fundamental supply and a speculative demand for an alternative to the struggling dollar, crude is carving an uncertain path. Today, the drop in oil that began this past Monday was reversed, but not before the market would make a brief test of fresh five-week lows. From a trader’s perspective, this bounce is the less controversial path for a market heading into a low liquidity period where US participation will be almost completely absent until next week. While volatile – this was the sharpest intraday rally since November 3rd – the commodity is still trading within a well-developed, descending trend channel that has guided price action since hitting the high for the year at $82.

For fundamental traders, there was some conflict between which driver would ultimately take responsibility for price action. Supply-and-demand fundamentals were in play with the closely monitored US Department of Energy inventory report crossing the ticker. As expected, stores recovered in the week through November 16th following a period where inventory was artificially depressed by Hurricane Ida. However, the increase was relatively constrained on a historical basis. Crude holdings grew 1.019 million barrels, falling short of the Bloomberg consensus for a 1.5 million increase. Gasoline stockpiles rose more than three times faster than expected with a 1.003 million barrel contribution and distillate fuels saw a contraction of 529,000 barrels against forecasts of no change. All told, this certainly falls well short of the unofficial expectations developed after the API reported a 3.347 million barrel jump in crude inventories the day before. What’s more, taken alongside the EIA’s suggestions yesterday that the distillate fuel demand could drop 7 percent through the fourth quarter and US refinery capacity is already approximately 2 million barrels over natural levels of demand, the equilibrium for supply and demand maintains it long-term skew. However, if tangible fundamentals were the only component of price action, there would no room for speculators. The true catalyst for momentum was the steady descent of the US dollar. The primary instrument for pricing for the commodity, the greenback is now forging new lows for the year just as US interests leave the market for the week.

Commodities – Metals

Gold Surges to a New Record High Just Below $1,200 as the US Dollar Plunges 15-Month Lows

Spot Gold  -  $1,190.80  //  $21.40  // 1.83%

All the standard fundamental drivers for gold were aligned for bulls Wednesday. With a healthy bid driving the market beyond short-term congestion, spot gold rallied to a new record high of $1,192.40 (and still rising as this report was being written). Looking to the futures market, a nine consecutive day advance on the active contract is the longest run for the market since 1982. Furthermore, gauging underlying speculative interest, aggregate contract volume (which lags a few sessions) was pushing to highs not seen since September 18th of last year while open interest hit a 23 month high. Momentum is clearly a heavy contributor to the steady advance; but there was nonetheless plenty of fuel for today’s rally. Still a source of speculation, a report from the Financial Chronicle quoted an unknown source in an article that said the Indian central bank would add to its 200-ton deal with the IMF on November 3rd. Skepticism would likely have held the market steady if it had not been for Russia’s announcement today that it would diversify its reserves into gold and commodity currencies while IMF reported Sri Lanka had purchased 10 tons from the international group this past Monday. Further adding to the momentum already developing on its own, the inflation protected Treasury index rallied to a new 14-month high on strong spending data from the US; and the US dollar tumbled to a new 15-month low on a trade-weighted basis.

Spot Silver  -  $18.82  //  $0.30  //  1.62%

Silver leeched off the momentum found in gold; but it certainly wouldn’t mark the meaningful milestones that its more expensive counterpart would. While Wednesday’s session would offer the first day of a clear direction (bullish) the advance wouldn’t overtake the yearly highs set earlier this week. As for underlying market activity, volume was substantially lower on the active futures contract – suggesting limited conviction in this revived advance. Aggregate open interest on the other hand was pushing highs not seen since April of last year; so today’s activity was likely anchored by the drop in liquidity into the US holiday.

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Written by John Kicklighter, Strategist
Questions or Comments about this article? Send them to jkicklighter@dailyfx.com