Fundamentals

Gold Marks its Biggest Plunge Since December 4th Reversal as Sentiment Stumbles, Dollar Rallies

North American Commodity Update

Commodities – Energy

Crude Recovery Stalls as Dollar Triggers Another Rally

Crude Oil (LS NYMEX) -  $72.78  //  $0.12 //  0.17%

If it weren’t for the momentum supplied through a mid-week reversal and yesterday’s sharp drop in inventory figures; crude prices would likely be much lower on the day. However, through the end of the US session, the benchmark commodity was little changed after a relatively volatile day. The primary driver for the session was underlying market sentiment. The winds of risk aversion were once again kicking up with global equity benchmarks sliding approximately one percent and gold tumbling over three percent at one point during the day. For oil prices, the dollar’s surge to a three-month high against its counterpart euro has played the dual role of risk barometer and a counter to the commodity (as the greenback is its principal pricing instrument). Can this plunge in risk appetite last? Not likely. We are heading into holiday trading conditions, which are prone to high volatility due to thin liquidity conditions; but the same conditions tend to dampen trend development. Another consideration is the rollover in the active futures contract. The January 2010 contract expires next Monday; but due to liquidity concerns, traders are already rolling out to the next contract. Typically, this position maintenance does lead to unusual price action; but it oftentimes also prevents trends.

Aside from heightened volatility, fundamental currents will retain their influence over prominent trends. Supply-and-demand fundamentals are taking a greater influence over the energy market after the correction over the past two months reduced a considerable portion of the speculative premium that had built up behind prices. There is still a tremendous glut of crude and fuel holdings in the market; but consumption and production reports are starting to change the outlook. This past week, the US Department of Energy reported a sharp 3.689 million barrel drop in oil inventories through the week ending December 11th.  This pulled total supplies to their lowest level since January 9th. Furthermore, total fuel consumption through the period jumped the most in nearly five year (6.7 percent) to a four-month high 19.6 million barrels per day. Yet, this is just a week’s worth of data. Current levels of supply are still well above the average for the year and demand is still weighed by the lingering influence of the worst recession in recent history. Next week, OPEC will have a chance to impact price action when members rule on production limits. However, the reported comfort with prices between $70 and $80 per barrel likely precludes any changes.

Commodities – Metals

Gold Marks its Biggest Plunge Since December 4th Reversal as Sentiment Stumbles, Dollar Rallies

Spot Gold  -  $1,104.70  //  -$33.20 //  -2.92%

With risk appetite on the retreat and the US dollar surging to a three-month high, gold would itself plunge to a month low. The precious metal, at its lowest point, was down nearly 3.5 percent for the day. This was the biggest, one-day decline since the December 4th drop off that finally collapsed the commodity’s steady bull trend. The extension of the markets biggest reversal since the first quarter can likely find its roots in profit taking and general position unwinding heading into the end of the year. Investors have played the dominant role in establishing ‘stability’ for the financial markets by returning sidelined capital back into speculative assets. Gold was one of the most desperately sought after securities in this shift as its tangibility and penchant for sharp capital gains appealed to market participants that wanted to recoup wealth lost during the 2008 market collapse but were also still cautious of the precarious of state of the markets so soon after a major bear market. Now, heading into the end of the year, we have waded through two months of congestion. This undermines confidence in every asset; but for one trading at record highs, it is particularly harrowing. Therefore, a speculative correction adds another dimension to year-end position squaring. However, ahead to 2010, true fundamentals will once again come into play. Demand for the precious metal will have to come from market players (investors, traders, central banks, etc) that are very confident in the potential for appreciation. There are fewer and fewer parties that can afford the asset at such elevated levels. On the other hand, the metal’s role as a dollar and inflation hedge can add to the buoyancy. Yesterday, the US consumer-level inflation report jumped back to a 1.8 percent annual pace to highlight the side effects of extremely loose monetary policy – a matter complicated by the Fed’s vow to hold rates at an “exceptionally low” level. In turn, low rates also diminishes the appeal of the dollar. The FOMC holds gold’s future in its hands.

Spot Silver  -  $17.24 //  -$0.47  //  -2.63%

Silver dropped for the first time in four days, spurred by the remarkable plunge in gold and meaningful rally in the US dollar. For drive, the same fundamentals that apply to the yellow metal apply here. However, there is a difference in severity of the move and overall trend that exposes how oversold the more dear commodity was at record highs. Demand for an a physical asset when financial markets are looking shaking increases the appeal of this more affordable asset. For market activity, aggregate volume continues to diminish as the end of the holiday period approaches. Open interest is similarly contracting as speculative interest drops off with the market’s correction.

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