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The Divergence Between Gold and Silver is too Remarkable to Ignore

Gold shot to another record high through Wednesday’s close; and this time the advance wouldn’t be worn down later in the session. The strength for the currency seems to be partly fundamental and partly speculative.

North American Commodity Update

Commodities - Energy

Crude Finds Strength on Rising Emerging Market Demand but Not Enough to Lead to a Breakout

Crude Oil (WTI) -  $79.00  //  -$0.05 //  -0.06%

Crude reported for another relatively quiet US session Wednesday as the combination of the Veteran’s day holiday, steady risk trends and delayed Energy Department inventory numbers offered little impetus to spark a new trend. Looking at liquidity, volume was exceptionally light in the front-month contract. The API figures for the week ending on November 6th did little to leverage bullish expectations for the more market moving DoE figures scheduled for release on Thursday. According to the group, crude stockpiles rose 1.217 million barrels following the previous period’s 3.276 million contraction. Gasoline and distillate stores similarly rose 1.403 million and 640,000 barrels respectively. Looking ahead to tomorrow’s figures; analyst forecasts are somewhat mixed. The government is expected to report a 1 million barrel jump in inventories through the end of last week along with a 350,000-barrel drop in gasoline and 700,000-barrel contraction in distillate holdings. For those more concerned about the bigger picture and ultimately the break from this past three/four week congestion pattern, we will also have to watch their estimates for demand. Last week’s implied demand reading for crude was 14,079 million barrels not far from a 14-month low.

As for global supply and demand, news over the past 24 hours shows a mixed picture. On the supply side, producers are trying to compensate for the drop in prices by increasing volume. This in turn further deflates price. OPEC reported its compliance levels were down to 60 percent with the 11 nations defined by the formal 24.845 million barrel a day limit actually pumping 26.523 million barrels. On the other hand, demand is looking up – especially for emerging markets. China reported crude imports surged to its second highest level on record in October on 4.5 million barrels a day for the period. With a strong pace of growth behind it, consumption trends keep the economy thirsty. However, it is the restrained appetite for the commodity in the industrial world (and the US) that will really define the larger trend.

 

Commodities - Metals

The Divergence Between Gold and Silver is too Remarkable to Ignore

Spot Gold  -  $1,117.40  //  $11.60  //  1.05%

Gold shot to another record high through Wednesday’s close; and this time the advance wouldn’t be worn down later in the session. The strength for the currency seems to be partly fundamental and partly speculative. Sentiment was on the rise throughout Thursday’s session; but the pace was certainly reserved. Buying on economic considerations seems to be able to fill the gap. Inflation expectations are on the rise with iShares’ TIPS inflation linked bond index rising to a new 13 month high for the day. There seems to be a belief that central banks will start to fight inflation before a speculative collapse (and perhaps actively diversify away from dollars along the way) as open interest on the futures market is at its highest level since January 2008. Speculators are clearly interested in what will happen next.

Spot Silver  -  $17.61  //  $0.26  //  1.50%

The divergence between price action in silver and gold is growing far more prominent. Whereas the more precious metal is climbing to record highs on a near daily basis; the more accessible commodity is more or less set within congestion with modest daily changes. This says something about general risk appetite and the highly speculative nature of gold’s record-breaking run. Silver is more closely tracking crude and the dollar which are awaiting a clear sign for investor sentiment before making critical moves. As for speculative presence, open interest in the futures market just recently fell back from their highest levels in 15 months – despite the three-week high in price.

 

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

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