Oil and Gold Advance in Tandem as Speculative Volatility Recedes Pre-NFP

North American Commodity Update

Commodities - Energy

Positive Momentum Carries Oil to the Boundary of Congestion, Leaving NFPs Responsible for Direction from Here

Crude Oil (LS Nymex) - $75.02 // $1.11 // 1.50%

Compared to the high correlation and definitive speculative momentum Wednesday; the capital markets were far more tame today. That being said, most of the growth and risk-dependent asset classes would nonetheless put in for a bullish follow up to the previous day’s remarkable performance. For crude, a second consecutive daily climb would mark the best back-to-back performance traders have seen in months. Furthermore, the push would put the active US futures contract into conspicuous contact with a blatant congestion ceiling. This is an appropriate technical move for the market considering the market’s developments from here are highly unpredictable. With the US employment report scheduled for release early in the US session, we could say a breakout is highly probable. However, with liquidity draining quickly into an extended holiday weekend, is this a viable scenario?

Before we just ahead to what should be expected from price action tomorrow, we look at the fundamental developments in today’s session. There was a significant round of scheduled event risk from various regions of the world; but most of it would fall short of influencing global activity and speculative confidence levels (the primary currents for this increasingly speculative commodity). From the US, a weaker than expected increase in factory orders for July is easily overlooked owing to the performance of the ISM manufacturing figure; while the ICSC chain store sales report offered a potential pull-through consumer-based demand for energy. What was truly remarkable however was the updates from Europe. The statistical group confirmed the Eurozone grew 1.0 percent through the second quarter; but a distinct jump in exports encourage scrutiny over whether the economy could carry such a pace going forward. For investors, the interest was in the ECB rate decision. The policy authority followed the Bank of Japan’s and Federal Reserve’s Lead by increasing their stimulus efforts and extending their refinancing stimulus program for regional banks. It seems the concern for growth and financial stability is a global issue – not promising. Off the macro-path, futures traders were tracking Hurricane Earl up the Eastern seaboard of the US. The storm could very likely disrupt consumption trends on refined fuels.

Looking ahead to tomorrow, there is a big market distorting event in the form of US payrolls. This indicator has proven itself exceptionally market-moving over history; but in recent releases, it has hardly registered because there is a general consensus over the general weakness of US employment. What’s more, with liquidity likely to drain early for the extended weekend, there will be an effort to prevent large swings in price action. In the meantime, volume on the active (October) Nymex futures contract stepped back to 31,928 shares from 396,607. For a long-term view, the one-year contango hit a new three-month high $8.13.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

Conviction Must have been Lacking Behind Risk Appetite for Gold to Mark a New Two-Month High Close

Spot Gold - $1,250.95 // $6.65 // 0.53%

Momentum carried the more risk-dependent asset classes higher Thursday; and yet gold would similarly advance through the session. Considering the precious metal is considered an ardent safe haven / alternative asset, what would this say about the state of the market? Given the lack of momentum and this breach in correlation, it is safe to say that the underlying pressure for the build in risk appetite was lacking for conviction. Therefore, with risk appetite letting up, we would see gold resume its medium-term drive within its clearly defined trend channel. With another push, the commodity would not set a fresh intraday high over Wednesday’s height; but the close would bring us to levels not seen since the end of June.

For fundamental drive today, the more timely contributions to short-term volatility would be overlooked by gold bugs. However, some of those indicators with sway over immediate price action would also serve to alter the long-term outlook for economic activity and financial stability for the world; and in that capacity, the metal was advanced. With fear of a global recession and perhaps the return of a financial malaise descending over the markets, investors would interpret Europe’s GDP numbers and monetary policy decision with weary eyes. For economic activity, the confirmed 1.0 percent pace for the period was encouraging; but the source of this performance (exports) left a stain of doubt that it could be carried through the end of the year. The ECB decision was far easier to interpret. While the benchmark lending rate was left untouched, the policy authority announced it would extend its unlimited one-week and one-month loans to European banks through at least mid-January and open up the gates to the three-month security in the fourth quarter. This is commensurate with the Fed’s decision to buy Treasuries and the Bank of Japan’s expansion of its lending facility as a sign that stimulus is necessary to keep the market’s stable – a discouraging sign and definitive means for devaluing traditional assets denominated in normal currencies.

For tomorrow, the volatility threat posed by the US NFPs and offsetting liquidity influence of an extended holiday weekend will have less of an impact on gold. Since the metal tends to filter the more reactive flows, this asset may be best for assessing the outcome of the data with market conditions stripped away. For traders, it is worth mentioning that volume on the active futures contract (December) cooled to a 62,471-turnover and aggregate volume continues to stabilize at excessively low levels. At the same time, volume in the SPDR Gold Shares index would also cool to 6,989 million shares as speculators eased back ahead of tomorrow.

Spot Silver - $19.65 // $0.29 // 1.50%

Borrowing from gold and speculative trends at different periods, silver has slowly worked its way to a critical point. The metal has advanced to a long-term range high that speculative traders will easily identify. A break of this level that is backed by significant fundamental support can easily push the market past $20 in short order. In the meantime, volume has shown it won’t be an easy decision for break as turnover measured 24,701 contracts.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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