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Gold Extends its Rally to a Record High following the Indian Central Bank’s 200 Ton Bid

Risk appetite has generally contracted over the past 24 hours; but gold has nonetheless rallied to a new record high. This juxtaposition can be fully attributed to a single event that has plastered the newswires since the early Asian session.

North American Commodity Update

Commodities - Energy

Crude Oil Catches a Draft from Gold’s Record Breaking Rally but the Fed Decision and Inventories May Stall Bulls

Crude Oil (WTI) -  $79.22  //  $1.09 //  1.40%

It has become the norm, thanks to the influence of risk trends, that equities, commodities and currencies all move in tandem when there is a meaningful shift in underlying sentiment. However, this morning, there was a distinct divergence among the various markets; and fundamentals were to blame. There is little doubt that a considerable attribution for oil’s strength must be made to gold’s rally to record highs. While the advance that originated with the precious metal was largely founded on unique supply and demand news, the sheer intensity of the rally was significant enough to bolster the entire commodity complex. However, through the US session, it became evident that oil would not be able to drive a critical, trend-warping breakout of its own. No doubt, this was partially due to the offsetting sentiment surrounding risk appetite in other asset classes – with speculative interests undermined by the RBA’s mitigating commentary. What’s more, with an ongoing round of interest rate decisions and inventory figures due through the rest of the week, crude traders will likely hold off on establishing big positions until they are sure of the landscape.

For the immediate future, the oil market will turn its focus back to the inventory data. The API figures are scheduled to be release at 16:30 EST; and the reported 3.532 million barrel drop in crude stocks stands in direct contrast to the Department of Energy’s figures for the same period. Speaking of the DoE report, forecasts are projecting a fourth consecutive weekly increase in crude inventories from this more market-moving report of 1.5 million barrels. The gasoline and distillates numbers will be just as imperative to volatility and the overall supply outlook (the latter stood at a 26-year high at the beginning of last month). Complicating the issue, there will further be notable event risk playing on underlying investor sentiment and thereby competing for control of the speculative-friendly commodity. The Federal Reserve will deliver their policy decision tomorrow; and while there is unlikely to be any changes to the benchmark lending rate, a move to drain stimulus further concerns that the market cannot stand on its own at its current heights.

Commodities - Metals

Gold Extends its Rally to a Record High following the Indian Central Bank’s 200 Ton Bid

Spot Gold  -  $1084.80 //  $25.30  //  2.39%

Risk appetite has generally contracted over the past 24 hours; but gold has nonetheless rallied to a new record high. This juxtaposition can be fully attributed to a single event that has plastered the newswires since the early Asian session. Back on September 18th, the executive board of the IMF approved a sale of 403.3 tons of gold to raise money for loans. Today, a large portion of that auctionable reserve was purchased by the Indian Central Bank. The 200 ton deal amounts to $6.7 billion and 8 percent of the annual global production of the precious metal. Alone this is a significant purchase and was justifiable in its immediate impact on underlying price. However, there is also potential for lasting strength from this event. This move by the Indian bank is a sign that banks could be turning into net buyers of the precious metal in an effort to diversify reserves (which further leverages gold because most are trying to move away from dollars – the foundation of gold pricing). This is a necessary booster for a security that is wavering between is correlation to speculative flows and safe haven demand. Should the round of central bank meetings this week show a consistent move to withdrawal stimulus from the markets, investors’ confidence in economic growth and a sustainable market rally could falter.

Spot Silver  -  $17.21  //  $0.75  //  4.56%

Inspired by the unprecedented surge in gold, silver would itself mark a massive rally through Tuesday’s session. A clean breakout from week-long congestion offers more room to navigate; but this specific metal is still far from the 15-month high set back in October. The correlation between these two commodities will likely ease should volatility settle; but if there is a marked correction from gold, the same will almost certainly happen to silver. As for supply/demand fundamentals, the COMEX warehouse report showed stockpiles were little moved in the week through November 2nd to 294.42 tons. 

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

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