Gold Overcomes a Lack of Risk Appetite on a Weaker US Dollar Following Disappointing NFPs

North American Commodity Update

Commodities - Energy

Crude Maintains its Pomp and Circumstance as Demand Forecasts Fill In for Risk Trends

Crude Oil (LS NYMEX) -  $82.67  //  $0.01 //  0.01%

If we were judging crude’s strength on Friday’s price action alone, we could say the commodity enjoyed modest volatility; but it ultimately lacked for direction. That is not the case when we look at the bigger picture. Though the NYMEX-based futures contract may have technically called an end to its most consistent rally (10 consecutive days) in 13 years; the trend itself is still intact. And, this is no minor trend. Stationed just above the previous swing high of $82.00 per barrel, the market is sporting a 14-month high and there are an array of bullish supports that could step in to revive activity should confidence start to flag. Taking responsibility for the bulk of the commodity’s strength these past three weeks are the unusually cold temperatures for the industrial centers throughout the Northern hemisphere. According to the US National Weather Service, the cold snap currently taxing energy demand in the United States is expected to pass next week; while the Northeastern region maintains below normal temperatures through the 16th. However, come Monday, traders may temper their expectations for this abnormal consumption booster will have on the rebalancing of supply and demand should the US Department of Energy (DoE) figures not contract sharply. Just this past Wednesday, data showed crude inventories actually rose 1.329 million barrels while gasoline holdings jumped 3.737 million barrels in the week ending January 1st.

However, crudes advance isn’t solely dependent on these demand functions. Speculative interests also factor in. Given the market’s recent momentum and current highs; speculators are no doubt interested. However, taking their cues from other markets; we have seen underlying risk trend have hardly budged in some time. A true recovery in the demand for yield can easily fuel another bullish leg for oil. Yet, in the meantime, we have seen the 20-day average of volume on the benchmark NYMEX futures contract drop to its lowest level since January 23rd of 2009. What’s more, this week’s Commitment of Traders report (COT) from the CFTC shows that despite a net 14,757-contract increase in speculative longs; bullish positions from this group only accounted for 8.8 percent of overall open interest. Finally, there is the dollar’s role in price action. Through the first half of December, crude tumbled while the greenback (its primary valuation tool) rallied. Today’s strength in the absence of new fundamental data and a general lack of risk appetite was largely due to the dollar’s tumble following the US NFP figures. The data influence on growth trends is tepid at best; but the milestone of a positive figure in November, was more than enough to encourage confidence among currency speculators (and thereby weigh the market’s favored funding currency)

Commodities - Metals

Gold Overcomes a Lack of Risk Appetite on a Weaker US Dollar Following Disappointing NFPs

Spot Gold  -  $1,136.73   //  $5.13  //  0.45%

Looking at a higher-timeframe chart of gold, it would seem there was very little activity in gold Friday. While the metal failed to maintain the aggressive trend that began the week, there was still plenty of volatility to carry the session through. Most of the day’s activity was centered on the short period following the release of the US labor data. According to the government, the world’s largest economy lost a net 85,000 jobs through the month of December. However, for gold traders and currency traders, the real number of interest was the positive revision to November’s figure to a 4,000-person increase. While the US economy is far from being out of the woods with employment, the milestone of the first net job increase in two years held serious weight. Traditional markets (primarily equities) offered little response to the data; but the more risk-atuned FX market would respond immediately by boosting carry interest and subsequently weighing the dollar lower. For gold traders, the mild speculative interest that came out of this data was leveraged by the dollar’s subsequent response as it played up its dollar-hedge role. Looking forward, a clear shift must take place for the precious metal to either overtake $1,140 or otherwise develop a reversal. Both risk trends and the US dollar are on the verge of breaking out (one will likely influence the other) and taking the first steps towards a meaningful trend; and the ripple effect on the gold will be unmistakable. On the other hand, speculative interests may not be a sure win for gold bugs. The SPDR Gold Trust cut a net 14.1 tons this past week (or 1.2 percent of its total holdings); and the COT reported a speculative long interest drop 2,723 contracts through January 5th to bring bullish interested down to 44.9 percent.

Spot Silver  -  $18.48 //  $0.25 //  1.34%

Despite the lack of overall risk appetite across the speculative markets, silver was able to extend its impressive run to encompass a seventh consecutive daily advance (making this still the strongest run for the commodity since the run through September 8th). What was the fundamental catalyst for the otherwise taxed commodity? The dollar. The greenback would tumble following the release of an otherwise tepid employment report. However, from this data the fundamental milestone of producing a positive net change in jobs (even one as modest as 4,000) in the November reason carried enough weight to encourage a drop in greenback. As for speculators interest in this commodity, the COT figures reported a 778-contract increase in net long positions to 39,499. Approximately 32 percent of traders are long.

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