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Record High for Gold as Sovereign Credit Risks Survive EU Rescue Effort

Record High for Gold as Sovereign Credit Risks Survive EU Rescue Effort

2010-05-11 23:57:00
John Kicklighter, Chief Currency Strategist
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North American Commodity Update

Commodities - Energy

Speculative Interests Settle after the EU’s Bailout, Crude Eyes $75

Crude Oil (LS NYMEX) - $76.06 // -$0.74 // -0.96%

Risk appetite wouldn’t hold up for long after the European Union announced a massive 750 billion euro bailout program to curtail the next financial crisis. Split between natural fundamental demand and pure speculative interest, crude oil would gain little ground after the news was integrated into price action Monday. By Tuesday, optimism had faded and speculators were once again monitoring critical levels in their respective markets. For NYMEX-traded oil, the consequence of the $75 per barrel level is obvious. Once again, the market is on the verge of toppling a bullish trend that has been in place since the first quarter of 2009 – the beginning of the recovery from the previous two years’ financial crisis. However, this is not just a precipice for crude. Equities, currencies and all yield-based assets are invariably facing the threat of reversal. Should this plunge occur shortly after the EU’s effort to stem the region’s bleeding, the negative impact on sentiment would be far worse than it would have been otherwise. Such a turn of events would be a clear sign of doubt over the collective governments’ ability to curb another market collapse. Given the powers that be are already overextended with obligations and stimulus measures, a second tumble may have to play out naturally.

Forecasting the threat of a financial seizure is more threatening to crude than merely depleting the speculative premium that is no doubt built into the energy market. The previous crisis was a lesson in how the withdrawal of credit and investment funds has a very real impact on economic activity. The industrialized world is already on shaky ground in its recovery; and a second blow could cause irreparable damage. What’s more, the emerging market economies are far more prone to trouble this time around. Strong growth in powerhouses like China helped buffer the global pain through the previous slump. Today, the nation is trying to deflate a speculative bubble and has just reported inflation has hit an 18-month high. For an unmistakable read on growth and investor sentiment concerns, the market will closely monitor the preliminary readings on first quarter GDP in Europe. Should the Euro Zone (or any of its major counterparts) show an unexpected set back before the Greek situation really started to deteriorate, confidence that the region will be able to ride out the storm going forward will dissolve quickly. In the event that macro data is met with indifference, oil traders will turn to the US Department of Energy’s inventory figures for the week ending May 7th. The analyst consensus is calling for a the 14th increase in crude holdings in 15 weeks, a figure that would fit with the increase in the API figures for the same period.

COMM511a

Commodities - Metals

Record High for Gold as Sovereign Credit Risks Survive EU Rescue Effort

Spot Gold - $1,232.88 // $29.78 // 2.47%

Though gold’s rally on Tuesday was not as technically as aggressive as the surge this past Thursday ($33.30 or 2.83 percent), this more recent advance certainly holds greater clout. Having persisted in a choppy but consistent advance over the past three weeks, the precious metal was able to push to a new record high. There is no doubt a speculative component to this performance. The proximity of such remarkable levels is always a draw for the traders looking to generate momentum through meaningful price developments. However, the fundamentals are just as accommodative to this move. Risk aversion is the primary catalyst for the commodity’s advance. Looking at other gauges for investor sentiment, equities would tip lower through the day and the US dollar would itself edge higher. However, gold’s take on sentiment reaches beyond simple flight-to-safety flows. This particular alternative asset is quickly being adopted as a hedge to currency exposure as well as the risk traditionally associated to speculative securities. Given this unique relationship, we see more clearly that doubt over sovereign credit risk is building despite policy markers’ efforts to curb record budget deficits and looming crises. The European Union’s 750 billion euro bailout plan is just one part (albeit a big one) of the market’s overall apprehension. Officials in the quickly sinking euro-area have already struggled to enact a uniformed rescue; and there are still severe doubts that they will be able to pull together on this most recent reiteration. However, the issue runs deeper than concerns with Greece. In the effort to revive economic activity and prevent a financial collapse in the wake of the 2007-2008 financial crisis; the world’s largest economies took on record levels of debt and toxic assets onto their balance sheets. Naturally, this prone financial position turns the standard safe haven choice (government debt); into a risky asset in its own right.

Spot Silver - $19.31 // $0.79 // 4.24%

There are a few fundamental drivers that can have an overwhelming influence over silver. Given the speculative interest in the metal through the futures markets, risk appetite often translates as most volatile driver. Furthering sentiment’s sway over price action, the inverse relationship to the US dollar (the primary pricing instrument for the commodity) further pushes the metal to one side of the risk spectrum. However, there is a third catalyst that cannot be overlooked: gold. As the second most traded precious metal, silver will often follow its more expensive counterpart when there is a large move to set a precedence. With the surge from the yellow metal, silver would be ushered up to a 25-month, triple top at $19.50. This is an obvious line in the sand for traders.

COMM511b

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

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