WEEKLY COMMODITIES UPDATE -
By Ole S Hansen -
Commodities continued to show weakness into the second week of 2013 despite rising stock markets and a falling US dollar. Investors are generally in a positive mood at this time of year, but so far this sentiment has only been seen in equities with global stocks rising to their highest level in 19 months. The US dollar rally seen during the first week quickly faded and the EURUSD has now returned to the top of its current range. However, so far this has failed to lift commodities. Chinese economic data, though, did help support prices as exports jumped by 14 per cent in December, thereby potentially confirming a rebound in the global economy.
Precious metals continued their tentative recovery amid the US dollar weakening on news that China’s appetite for gold remains strong. The price of oil meanwhile, is stuck between supports from improved economic data and a well-supplied market that led Saudi Arabia to cut its December output to its lowest in 19 months, according to one source. In addition, US oil imports have dropped to their lowest level in 25 years because of increased domestic production.
Some of the excitement caused by the Chinese trade data were somewhat scuppered late in the week when Chinese inflation data for December jumped by more than had been expected. A rise in inflation could restrict the government’s ability to stimulate growth further. This could potentially reduce demand for raw materials from the country that accounts for a large proportion of demand growth for many commodities including soybeans, oil and copper.
Gold receiving a boost
Following nervous trading during the first week that saw gold trade down to late August levels, the yellow metal spent the second week trying to recover. The 200-day moving average at 1662 that held it back for a few days was eventually broken. However, the lack of any follow-through momentum indicates the need for additional consolidation before a potential upside attempt towards critical resistance at 1710 can be initiated. Measured in EUR, gold is still performing very poorly and before we see a pick up in this cross further upside looks difficult to achieve. But at the time of writing gold is on track for its first positive week following its longest weekly losing streak since 2004.
As the effects of the gold-negative December minutes from the Federal Open Market Committee (FOMC) begin to fade, gold has received some support. This came especially from the weaker USD but also from news of increased physical buying from China and India, the world’s two largest buyers of actual gold. Chinese demand is expected to pick up ahead of the Lunar New Year on February 10 while Indian demand has risen with traders stocking up ahead of an expected rise in gold import taxes which could be raised to help limit the country’s trade deficit.
Money managers halved their net-long position during the last quarter and have ample room therefore to rebuild position once they feel the technical and/or fundamental picture improves. Investors in Exchange Traded Products have stayed much more resilient and have only scaled back their holdings by a mere 13 tons out of total holdings of 2619, according to Bloomberg.
Although we are not out of the woods yet in terms of the risk of additional price weakness, the belief is that we should see some further upside potential especially as real interest rates remains negative and in that US forward inflation expectations have moved higher since late November.
Technically, the levels to look out for are first of all whether gold can manage to consolidate above its 200-day moving average at $1662/oz. After this, attention will turn to resistance at the 2 January high at $1694.8/oz. before the most important level at 1710.7, which is a combination of a trend-line from the October high together with a 50 per cent retracement. Critical support can be found at $1625/oz.
Brent crude eased back from a near three-month high this week as focus switched from investor demand driven by rising stock markets and a generally friendly investment environment to news that Saudi Arabia had cut its December production while US imports fell to their lowest level in 25 years. Reduced Saudi production results in a higher level of spare capacity which can be used to meet future supply disruptions while lower US imports means that more oil is available in the global system for those countries, especially emerging economies, where demand is growing.
When Chinese inflation rises by more than expected it reduces the government’s ability to promote growth. With China currently expected to represent almost half of this year’s increase in global oil demand growth, any changes to these projections could help trigger an oversupply scenario which could ultimately lead to lower prices.
Money managers held a net-long position on 1 January which was only exceeded in March last year when worries about the impact of Iranian sanctions saw Brent crude oil trade above $123/barrel. Such an elevated position size at a time of limited upside potential could eventually help trigger a setback in prices. We expect the trading range of between $105/barrel and $115/barrel that has prevailed for some time now to continue.
But we also see a short-term risk of the price dropping back towards the lower end, which is good news for non dollar-based consumers because the dollar is falling at the same time.
(The author is Head of Commodity Strategy at Saxo Bank)