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Gold Collapses and Oil Hits 3-Month Low, No Longer a 'Risk' Trade?

Gold Collapses and Oil Hits 3-Month Low, No Longer a 'Risk' Trade?

John Kicklighter, Chief Strategist

Talking Points

  • The DB Powershares Commodity ETF hit a series’ low Monday as S&P 500 stood just off a record
  • Gold suffered its biggest jolt since December 1 on a sharp drop to five-year lows
  • Oil prices have slid to three-month lows

It used to be that commodities represented one of the venues that risk-minded traders will take when they were bidding higher returns – particularly in risk-positive conditions. However, we are seeing clear evidence that this particular asset class has lost a lot of its clout as a speculative favorite from metals to energy to ‘softs’.

The biggest move to start the week – and arguably one of the biggest in months – was the dramatic tumble from Gold. The metal fell nearly 3.4 percent on the day Monday and as much as 5.5 percent through the session’s low. This drop occurred through the opening move of the Asian session as a bulk selloff in China seemed to leverage the illiquidity of the opening session. As can be seen below, total volume on the day was relatively low and the CBOE’s volume index for the metal were restrained though the commodity still hit a five-year low.

GOLD'S VOLATILITY INDEX IS ONLY THE HIGHEST SINCE MARCH

Looking at retail positioning, the drop from the precious metal lead to a sharp drop in long speculative positions. From a position of more than four times the long-to-shorts taken, the ratio declined to just over two.

Gold Collapses and Oil Hits 3-Month Low, No Longer a 'Risk' Trade?

Gold wasn’t the only commodity effected on the day however. The broader asset class would slide Monday, and a notable loser was oil and energy. Oil prices didn’t show the same level of intensity as gold in its own decline, but US-based WTI would still drop to a three-month low. Once again, the CBOE’s tailored volatility measure didn’t seem to fully encompass the level the underlying market would drop to.

AS OIL SLIDES, VOLATILITY INDEX STARTS LOOKING AT-RISK

Taking a look at the broader, commodity asset class; we find a clear divergence from the performance of a more attuned ‘risk benchmark’ – the S&P 500. While the benchmark index was unable to secure a new record high through the past session (the 41st trading session without a record for the longest drought since February 2013), it was nevertheless in firm control of the bulls. Meanwhile, the Powershares Deutsche Bank Commodity Index dropped on the day. This particular measure hit a series low (back to 2006) while Bloomberg’s own commodity index hit its lowest level since 2002.

COMMODITIES AS A 'RISK ASSET' PLAY?

Commodities have played a role over the years as a ‘risk asset’. That bearing has significantly weakened however over the past months and years (as can be seen in the chart below). This is not something unique to this asset class but rather is a reflection of diminished conviction in investor confidence itself. While some benchmarks continue to press higher, they are increasingly unique players. If speculative appetite is not a universal motivator, it is more likely to falter altogether. In the meantime, the weaker players in the spectrum will falter first.

Gold Collapses and Oil Hits 3-Month Low, No Longer a 'Risk' Trade?

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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