Oil Tumbles while Gold Holds as Risk Aversion Lacks a Fundamental Stabilizer

North American Commodity Update

Commodities - Energy

Energy Traders Adopt the Pessimism of Equities Participants, Ignore Improvement in Data

Crude Oil (LS Nymex) - $74.09 // $0.61 // 0.82%

Having carved out a long over-due bullish correction following its most prominent bear wave in three months, US-based oil seems to have hit the extent of what can be expected from speculative drive. At this point, the market requires fundamental drive to establish a genuine direction for a market that has been more or less range bound since May. In the sense that today’s price action was generally a counter-move to the end-of-the-week drive through this past Friday, congestion is still a hurdle for the market to overcome before a genuine trend is developed. For today’s volatility, selling pressure was consistent (with the session opening near its high and ending near its low), suggesting there were few specific catalysts to price action. This pace is similar to the intraday chart trend that was seen with the S&P 500 (another benchmark for speculative sentiment). Following investors’ appetite for risk is not unusual for this commodity; but it is surprising today given the level of event risk on tap.

Ensuring that we would not be left without guidance for the economic supply and demand for this precious resource, the docket was brimming with high-level releases Monday. From the dense calendar, the US personal income and spending data was the top scheduled event risk. Traditionally, the spending figure is more important for economic activity - and thereby supply-and-demand considerations - as personal consumption accounts for approximately three-quarters of economic activity in the world’s largest economy. Yet, many would count the income figure a disappointment for falling short of the consensus forecast with a 0.2 percent reading. In reality; both are positive developments. That being said, speculators have growth very dovish over the future of the US and world economies; so there is little confidence to be found in such lagging figures. The same can be said about the reported two-year high in the European economic confidence survey. Most investors are cognizant of the impossible task of balancing growth and austerity measures; so this data does little to pacify. This does not mean however, that this data will be completely overlooked. On the contrary, this data is being factored in for medium-term expectations as they build into speculative and growth forecasts. For this reason, the Japanese factory and retail data, Australian sales, German employment, UK consumer credit and US consumer confidence data will all play some sort of role in oil’s future.

In the meantime, we have seen that with a necessary correction following the market’s strongest rally in a month comes a sharp drop in volume. The October futures contract reported turnover of 240,856 contracts versus Friday’s 477,903. That being said, the delayed aggregate volume reading hit its highest level since May 17th this past Friday.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Heavy Off-Docket Event Risk Clashes with Gold’s Quick Drop in Volatility

Spot Gold - $1,236.97 // -$1.13 // -0.09%

While it is true that risk-based assets were moving counter to the scheduled event risk to provided, at least they produced a significant level of volatility. The same cannot be said about gold. Spot gold carved a severely restrained $5.43 range through Monday’s session which is a consistent decline in activity levels since last Tuesday. However, putting it into greater context, we can see that this measured pace actually fits the general pace the commodity has maintained for nearly five weeks now. It is the contrast between metal and the other financial benchmarks for risk and reward that is truly interesting. Considering the assets more reactive to the whims of investor confidence have been very volatile but without a clear bearing, we are left to assume there are two means for speculative interest. On the one hand, we have speculative interests moving in and out of the market very quickly (creating the volatile congestion); while, there is simultaneously a steady build in the precious metal generally considered the best alternative to normal financial instruments.

Gold’s steady climb was further facilitated in today’s top headlines. The 0.4 percent increase in personal spending for the US through July and two-year high in the August economic confidence figures for the Eurozone are positive only so far as they are lagging indicators that reflect stimulus and passing economic trends. Global investors are far more skeptical about the health of the global economy and financial market. And, in this unease, we were met with another development whereby the world looks to be heading towards a second wave of quantitative easing. As expected, the Bank of Japan held an emergency meeting to start the week and decided to increase its lending program from 20 trillion to 30 trillion yen. Leaving little ambiguity to the fact that this was a response to deteriorating forecasts, the policy authority noted concerns over the uncertainty of the future – especially in the US. Furthermore, they labeled stocks and currencies as being especially “unstable.” The stimulus theme will continue through the week. Tomorrow, the Fed’s minutes will tell the market whether the Fed has discussed and is receptive of further policy easing. Then, on Thursday, the ECB will tell the world whether it will maintain is extraordinary policy of extending support to Europe’s financial institutions. What does all this stimulus mean? It is more distorting than stimulating at this point.

From the futures market, we see volume on the contract that expires in December dropped sharply to a six-week low of 36,244 contracts. This matches the general restraint noted in aggregate volume (total volume across the various contracts). It is also worth noting that open interest in the futures market is highest for the $1,500 strike on the December contract – a bullish sign.

Spot Silver - $19.02 // -$0.08 // -0.40%

Silver would show the same restraint as gold but would offer a bearish close similar to equities. Just off a two-month high, Monday’s volume for the liquid December contract was more than halved from 38,392 contracts on Friday to 16,565.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

Discuss gold and oil trading with other traders in the DailyFX Forum

Written by John Kicklighter, Strategist

To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com