Gold’s Momentum Breaks as Chinese Central Bank Governor Implies Commodity a “Bubble” Asset

North American Commodity Update

Commodities - Energy

Crude Oil Finds Moderation to its Decline despite Discouraging Data and Minister’s Assessment of ‘Excess Supplies’

Crude Oil (WTI) -  $76.18  //  -$0.42 //  -0.55%

Just as surely as crude would stall in the rally that opened the week at a meaningful technical level; speculators cooled the commodities bearish momentum as $75.50 came into view. Without a momentous shift in supply-and-demand fundamentals or general risk appetite, the market will find it difficult to move beyond the established congestion of the past month and a half. Today’s price action was the combination of restrained event risk and speculative interests. For traders, risk appetite was faltering into the afternoon of the US session with a distinct pick up in the US dollar and sell off in equities. Oil’s appeal as a physical asset and alternative to the traditional, dollar-based securities diminished. For more tangible fundamentals, Kuwaiti Oil Minister Sheikh Ahmed al-Abdullah al-Sabah weighed in on the dynamics of crude’s current price. The OPEC member said the commodity is being artificially lifted by a weak US dollar and speculative flows. In fact, he suggested that there was an “excess oil supply;” implying prices would be much lower if traditional valuation methods were employed. 

There is plenty of evidence to support claims that supply is excessive. This week’s Department of Energy inventory figures reported US crude holdings rose 2.091 million barrels (the biggest increase in two months) to 339.9 million barrels – the largest glut since August. Today, the burden of surplus in the energy complex as a whole was furthered by a report that US natural gas inventories rose to its own record of 3.837 trillion cubic feet. Alone, a high-level of overhang wouldn’t necessary deflate prices. However, coupled with continually depressed levels of demand, the commodities potential value is further diminished. In the same DoE report yesterday, fuel consumption dropped 497,000 barrels and total demand in the four weeks through November 27th averaged 18.5 million barrels per day (down 3.2 percent from a year ago). Another contributor to today’s price action specifically was the unexpected drop in US service sector activity. We will see Friday whether US non-farm payroll figures can alter the outlook for demand from the largest consumer in the world.

Commodities - Metals

Gold’s Momentum Breaks as Chinese Central Bank Governor Implies Commodity a “Bubble” Asset

Spot Gold  -  $1,212.70  //  -$3.00  //  -0.25%

Gold forged a new intraday, record high Thursday; but the high-flying commodity wouldn’t be able to hold on to its gains. Today’s price action closely mirrored the path of its benchmark counterpart: the US dollar. Playing its role as a hedge to the currency, the greenback’s second consecutive daily advance tempered the unchecked momentum the commodity has enjoyed this week (and which has generally supported price action in the spirit of trend since the beginning of November). However, this correlation founded on speculation proved a source of concern from an unexpected official. PBoC Governor Hu Xiaolian was quoted as saying the precious metal’s price was very high and that the central bank would be careful with investing in “bubble” assets. Considering the prohibitive cost of gold; central banks are one of the last few promising buyers left in the market. Considering China has excess funds to invest in their continued effort to diversify away from the US dollar, their labeling the commodity as essentially at a oversold levels is concerning. Perhaps investor interest can maintain momentum. SPDR Gold Trust, the largest ETF backed by the gold, reported a third consecutive increase to its holdings to 1,131.21 tons. This is very close to the record 1,134 tons set approximately six months ago.

Spot Silver  -  $18.97  //  -$0.27 //  -1.40%

Silver was once again a more responsive reflection of gold. The more affordable metal suffered from a rise in risk aversion that bolstered the US dollar and pulled stocks down into the closing hours of the US session. Following the path that significant levels are creating for traders, $19/ounce is proving as significant a support as it was resistance last week. Bullish momentum is still safely in since the upswing from late October began. Looking at trading activity, however, aggregate volume on the active futures contract has dropped off sharply since the market overtook the $19 level. The same is true of aggregate open interest.

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