Oil Plunges and Gold Rallies as Confidence in the Future Deteriorates

North American Commodity Update

Commodities - Energy

An Oil Reversal has been Cut Building Fundamental Uncertainty

Crude Oil (LS Nymex) - $71.92 // -$2.78 // -3.72%

As if a forceful reminder that the global economic outlook is bleak and fading with each series of economic releases, US-based crude marked a sharp decline through Tuesday’s session. The 3.7 percent decline through the day’s end was in fact the biggest single-day loss since June 4th and meaningful follow up on Monday’s loss. Looking for the fundamental basis for this move, we for once can’t trace the heightened activity level back to a general shift in risk appetite. If we look at another benchmark for investor sentiment, the S&P 500, we are presented with a surprisingly stable bearing. This is an unusual situation whereby a particular asset class generates hearty volatility without the support of an underlying capital current. That being said, the absence of such a fundamental backbone could ultimately stall oil’s tumble and ensure the Nymex-based contracts support at $70.75 holds up.

So, if a market-wide effort to sell risky positions wasn’t at the root of today’s tremendous volatility; that would suggest macroeconomic event risk was the likely culprit. It so happens that an intraday chart of the electronically-traded continuous contract showed the tumble began after a short-lived bounce just after the Conference Board’s US consumer confidence survey results crossed the tape. The headline reading was better than expected at a 53.5 reading; but the details left the door wide open for skepticism. To get a better sense for the indicator – it has held a range near around the neutral level (50.0) since the reversal from its record low last March. All in all, the health of the United States’ (and thereby the world’) largest single economic driver – the US consumer – is still gloomy. Alone, this indicator would likely have left the energy market listless; but regional manufacturing activities would help define selling pressure. The Chicago PMI reading for August expanded at its slowest pace since November and the Milwaukee figure hit a six month low. This sets the bar low for tomorrow’s nationwide ISM factory activity report due tomorrow. And, considering this particular area of the economy is one of the few remaining pillars of expansion, it will carry weight.

Futures traders will also note a few interesting market-specific developments. First of all, Hurricane Earl is building strength in the Atlantic; but it doesn’t look like it will disrupt Gulf of Mexico extraction and refining. Also interesting was the API inventory figures. The voluntary survey reported a 4.77 million increase in stockpiles to 361.5 million barrels. This will draw attention to tomorrow’s (mandatory) DoE report which economists predict will report a 1.2 million barrel increase for the past week. Aside from these disruptions, it is worth noting that the October futures contract is just off its lowest close since July 2009 and the two-year contango (difference in premium between current contract and the contract due to expire in two-years) is just off the record low $11.26 set last Friday. Volume in the active nearby increased from Monday’s 260,666 to 456,449 contracts.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Gold Advances to a Two-Month High as FOMC Undermines the Role of the US Dollar

Spot Gold - $1,247.45 // $10.47 // 0.85%

There are few viable safe havens nowadays. Sure, there are more than a few assets that fit the bill of liquidity and/or are considered standard bearers for academia. However, a true refuge from a cataclysmic turn in the financial markets is more difficult to come by. Many belief gold fulfills this role; and that belief is keeping the metal moving higher. Through Tuesday’s session, the commodity finally broke from congestion and subsequently posted its biggest advance in three weeks. This surge keeps the market within its five-week rising trend channel and ushers the market up to its highest close in two months. What most speculators really care about though is the fact that the commodity is closing in on record highs. When the yellow metal puts its toe over that line, it will leverage media attention and could very well produce a speculative boost (or reversal).

If we look at the intraday price action, we see that gold surged over $11 on the open of the US pit session. The macro catalysts for this period were sparse and risk appetite itself was relatively stable according to liquid European equities and the less liquid US equity futures. More likely than not, this was a natural wave of bid orders that were processed and filled in an otherwise thin market. After the drive, however, liquidity would certainly remain elevated. No doubt a contributory factor (both short-term and long-term) was the health of the US dollar. The greenback came under distinct pressure at exactly the same time – though the selling progress made was far more restrained than gold’s rally. The currency/gold link comes through the demand for a viable safe haven as speculation builds that the world’s economy is soon to stall and the slump will encourage a financial snap somewhere along the way. In this bearish mix, few assets will protect investor capital much less produce a return. Gold is one of those assets that are expected to be the outliers. In reality, the limited liquidity, leveraged volatility and lack of yield (the argument for inflation doesn’t hold water for actual income) undermines such a role. However, when desperation takes over, these ‘trivialities’ can be overlooked. Further helping to funnel protectionist capital to gold’s waiting arms was the hit that the US dollar would take from the FOMC. While not particularly surprising, the minutes of the Fed’s last rate decision would prove the role of the greenback is perhaps eroding more quickly than expected. Amid warnings that the second half of the year would be more moderate in growth than previous expected, the group would voice a willingness to further expand stimulus and thereby devalue the dollar.

From futures, we note that there was a significant reversal in the December contract’s volume. Turnover today totaled 100,976 contracts whereas yesterday it was 38,820. That being said the monthly average on the aggregate volume reading hit its lowest level since September 9th of last year.

Spot Silver - $19.35 // $0.34 // 1.76%

With general risk appetite little changed on the day, silver traders were free to pursue the gold proxy. The metal would mark its highest intraday high since June 21st and close since May 17th. Volume would further increase on the December contract to 27,280.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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