Gold Suffers its Biggest Daily Drop in a Year as the Dollar Surges

North American Commodity Update

Commodities - Energy

Crude Oil Undergoes Extreme Volatility on a Dramatic Swing in Risk Appetite

Crude Oil (LS NYMEX) -  $75.55  //  -$0.91 //  -1.19%

The broader capital markets were extraordinarily volatile through Friday’s session; and though fundamentals would contribute to crudes price action, sentiment was the primary catalyst for the commodity (just as it was for most asset classes). Through most of the Asian and European sessions, price action was relatively staid. A few headlines would encourage modest adjustments in price; but most energy traders were sitting on the sidelines to avoid the risk inherent to the US employment report due early in the New York session. While releases in recent months have generated limited volatility, the November NFPs proved the indicator has not completely lost its renowned impact. Following along the lines of the general improvement that we have seen throughout the year, the reported net change of 11,000 jobs lost was the closest reading to a positive post that we have seen since December of 2007. Adding to the mix, the previous month’s 190,000 net contraction was revised up to 111,000 and the jobless rate unexpectedly dropped 0.2 percentage points to 10 percent. For crude traders, the net impact of this data is an accelerated time frame for a solid recovery and rebound in fuel consumption to work down the incredible glut that has built up since the recession washed over the globe. Armed with such speculations, oil rallied as much as 2.7 percent on the day. However, this upswing wouldn’t last. Shortly after US liquidity filled out, risk appetite would collapse and send the markets spiraling. And, while this speculative asset would naturally respond to the reduction in risky positions; the rally from the US dollar (a safe haven) would only further exacerbate crude’s reversal as its primary pricing instrument.

For all the end-of-week volatility however, oil is still within its six-week congestion pattern. This is an important point to make heading into next week. If speculative trends settle over the weekend, the commodity is well-positioned for a quick return to ‘normalcy.’ However, the probabilities are working against a ‘business as usual’ pace. Background, supply-and-demand fundamentals are an incessant weight on price. This past week, the US Department of Energy reported a 2.091 million barrel increase in inventories through November 27th pushed total stores to its highest level since August. Furthermore, fuel consumption contracted 497,000 barrels in the same period and total demand through the month was 3.2 percent below comparable levels a year ago. When it comes down to it though, speculation will likely be responsible for the market’s stability (or lack thereof). As Kuwaiti Oil Minister Sheikh Ahmed al-Abdullah al-Sabah commented this past Thursday, a lot of the buoyancy in crude can be attributed to the weak dollar and overbearing speculation.

Commodities - Metals

Gold Suffers its Biggest Daily Drop in a Year as the Dollar Surges

Spot Gold  -  $1,155.80  //  -$51.80  //  -4.29%

Gold has benefited from three independent functions over the past few months (speculative asset, inflation hedge and dollar counterpart); but a related rally in the dollar and plunge in speculation would easily work with theory that the metal was - at least temporarily - oversold. The past week was one of records. From a record high of $1,226.56/ounce set on Wednesday; the commodity would see its sharpest one-day decline since December 1st of last year to close the week. What would instigate such an incredible move? Risk appetite. In the recent past, sentiment has pulled back modestly. And, in the tempered countertrend move for other asset classes; gold would find abundant buying interest through its role as an inflation hedge or investment capital coming from other high-yield assets. The reversal that closed the market on Friday was of a different quality. With risk aversion hitting a near-fevered pitch, the commodity’s record highs would become circumspect. What’s more, the underlying shift in sentiment would encourage a distinct and aggressive rally in the dollar – gold’s primary counterpart . Looking ahead to next week, such a sharp one-day move would suggest a period of moderation is at hand. However, should the dollar forge a meaningful reversal and risk appetite enter a true bear trend; gold has a long way to fall.

Spot Silver  -  $18.48  //  -$0.35 //  -1.83%

With the broader markets suffering from the slump in risk appetite through week’s end, silver will follow suit with its own decline for the day. However, in comparison to gold; this precious metal’s loss can be construed as tame. Without the burden of supporting record highs or playing the direct hedge to the dollar and inflation; silver’s response to the shift in sentiment would ultimately be on par with equities and crude: significant on an intraday basis but by no means a trend defining change. On the other hand, spot has dropped back below $19; and the CFTC’s Commitment of Traders data for the week ending December 1st was already showing a reduction in speculative interest before the fireworks really began. Should risk aversion develop a following market-wide; silver will reverse course just as surely as gold will.

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