Crude Attempts to Confirm Reversal, Gold Extends a Remarkable Trend

North American Commodity Update

Commodities - Energy

Has Crude Established a Critical Trend Break on a Light Fundamental Day?

Crude Oil (LS Nymex) - $74.43 // -$0.99 // -1.31%

Technical traders will note that Thursday’s close for US-based crude officially pushed the lower boundary of a three-month rising trend channel. If this were to occur when the general activity level of the market were higher, earlier in the week or amid a thicket of scheduled event risk; there would almost certainly be a speculative reaction to this development that catalyzed meaningful follow through. As it happens, the newswires were relatively quiet through the day – at least when it comes to those indicators that can alter expectations for supply and demand factors. The true driver for price action this morning was the market-wide drop in sentiment around the time US exchanges came online. In fact, in the opening hours of trade, the Dow Jones Industrial Average dropped 1.9 percent while oil fell 2.1 percent over the same period.

For fundamental catalysts, the UK docket would offer something of a boost with a two-year high in its CBI measured manufacturing activity report (the the indicator is still showing net responses of falling order expectations. As for the US data, the news was far from encouraging. The silver lining was more a sliver with a Leading Indicators composite (used for projecting growth for the coming three to six years) for July tipped a tepid 0.1 percent increase that doesn’t conflict with speculation that the world’s largest economy is cooling. The less expansive indicators were more discouraging. Initial jobless claims jumped to a nine-month high and weighed investor confidence and expectations for consumption going forward. With fewer steps to energy demand, the Philly Fed manufacturing survey posted its first contraction in 13 months. Off the calendar, supply gluts seem to be a problem for more than just the US (the DoE reported petroleum reserves hit its highest level in over 20 years). The Oil Movement shipment figures reported exports from OPEC will drop 1 percent through the month ending September 4th due to curbed demand from China.

From the futures markets, we can see that today’s technical break wouldn’t raise activity levels much. The CBOE’s volatility index for crude was little changed at 34.2 percent. Furthermore, volume on the active October futures contract slipped slightly to 270,452 contracts though open interest on that particular instrument hit a new record high. Furthermore, aggregate volume (delayed) is still just off its lowest levels in a year.

Crude Futures Chart (Daily)

Chart generated usingFXCM Strategy Trader

Commodities - Metals

A Seventh Consecutive Advance Offers a Steady but Exposed Trend for Gold

Spot Gold - $1,233.80 // $4.10 // 0.33%

Though gold’s advance this past three weeks hasn’t been particularly aggressive, the consistency that it has run is impressive. The commodity has climbed for seven consecutive sessions and has posted a positive session in 15 of the past 17 trading days. This is not something to scoff at. At the same time, neither does it inspire too much confidence. Looking at the speculative backdrop to this unique advance, we see that risk appetite trends have been fairly mixed and without a distinct drive for over a week. In fact, the metal has weathered a tentative correction in favor of risk appetite through the first half of this week – a move that would typically weigh the save haven metal. This could be assessed as evidence that gold is exceptionally strong; but that notion is somewhat diminished by the fact that the climb has been relatively week. In reality, this advance is more likely a response to the broad ranges that has developed for the capital markets over the past two weeks. When conviction returns, the situation could change dramatically.

For a fundamental assessment of the market’s performance, standard risk concerns do not apply. The prohibitive cost of the metal weakens its correlation to day-to-day swings in capital markets. That being said, systemic uncertainties and fund buying are having a greater and greater influence on price action recently. Of interest Thursday, both Chinese and European officials tried to play down market fears that both regional economies are heading towards major trouble shortly. China’s Finance Ministry stated that it believed the potential loan loss on local government lending (estimated to be 23 percent of a $1.1 trillion market) was “manageable.” In Europe, the EU attempted to settle long-lasting concern over Greece by suggesting the economy would meet the necessary criteria receive the next round of its bailout. Both of these come loaded with significant doubt; and this skepticism naturally fits into gold’s prevailing trend. As for speculative interest, ETF holdings reportedly grew 0.2 percent to 66.4 million ounces on the day (though they are still 0.5 percent down on the month).

From the futures market, the active December Comex contract reported turnover of 80,847. This is a steady cooling in activity from the late July peak even though open interest continues to grow. For the bigger picture aggregate volume is still extraordinarily low. Perhaps we need a financial crisis to get this market moving again.

Spot Silver - $18.30 // -$0.07 // -0.38%

Silver’s daily range Thursday was notably smaller than that of the previous session. This is remarkable because other highly risk-sensitive asset classes (equities and crude) were putting in for significant drives. Such a modest turnout is a mixture of both moderation linked to gold and the fact that the other capital markets are set in broader ranges. For reflection on activity levels, open interest on the Comex’s active December futures contract marked a sharp drop from yesterday’s 26,915 turnover to 10,031.

Spot Gold Chart (Daily)

Chart generated usingFXCM Strategy Trader

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Written by John Kicklighter, Strategist

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