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CRB - Commodities Ring Bearish
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Good Afternoon,
Gold experienced a second day of heavy liquidations, following yesterday oil-led and hawkish Fed-induced rout. Significant losses in the euro were seen following reports of steep drops in Eurozone industrial orders and they helped the greenback climb to near 72.75 on the index and thus reduced the immediate appeal of gold, along with its value. Prices skirted a low of $920 during Wednesday NY session, and threatened to take the metal back to the high $800's if the pattern continues. Bullion has now erased about $70 off the Fannie/Freddie/Indy -related peak of $989 seen just a bit over a week ago.
At this point, we can no longer just look at options expiry and the rolling over of positions into the winter months for explanations or excuses. The dollar caught a very favorable wind in the words of Messrs. Plosser and Paulson yesterday and its sails are inflating just about as fast as those of oil and gold are deflating.
The swift passage of Freddie/Fannie rescue legislation (expected today) is also putting a dent into the commodities which climbed the big wall of worry last week. In fact, Zachary Oxman, over at Wisdom Financial opines that "We seem to be in the midst of a large-scale commodities sell-off." His words echoed those of several traders surveyed over the past week who feel that the easy money has been made in commodities and that the start of a sector rotation (by speculative funds as well as individual investors) out of them may well be underway. See below for more details on the topic.
Oil prices dropped further, as the oil installations in the Gulf of Mexico appeared to have avoided what could now be a Cat 2 storm slated to hit the US/Mexico border later today. Although crude recovered some of its losses later in the day as Dolly gained additional strength near Brownsville, TX, gold was not as fortunate. New York's midweek gold trading session had the metal showing a $21 loss at last check, at $924.00 per ounce, as the trade monitored oil values near $127.40 - about $20 from their recent peak- and the euro trading at 1.570 against the US dollar.
Silver showed losses of 48 cents to trade at $17.43 while the noble metals complex continued to slip with platinum losing a massive $55 to $1742 and palladium cracking the $400 level to sink to $387 per ounce, off $16 on the day. South Africa's power supplier -Eskom- forecast no load shedding events for the winter as the crisis phase of the situation appears to have been overcome for now. The country's mines appear to have limped along with the 90 to 95 percent level of available electricity and are slated to yield more metals as the situation stabilizes and/or improves.
Such developments contributed to the white metals fading in value this morning as well. Platinum extended is longest losing streak in six year and according to our friend Miguel Perez-Santalla over at Heraeus (a very well-know platinum trading firm) " The big news this morning is the drop of both platinum and palladium as investors seem to be bailing out." The power story from S. Africa coupled with dismal auto sales expectations are eating away at values.
In a move that is likely not just designed to freshen gold's image, the World Gold Council has decided that the tune it sings to India's gold buyers needs to be dramatically altered. Abandoning its "Speak Gold" campaign, the organization now plans to go directly for the proverbial jugular and highlight gold's historic and deeply ingrained allure and connection within the culture of India. The new campaign will be named "Only Gold" and it will aim to stir emotions and buying impulses that it hopes will look past the price tag of gold items in the bazaars of India and tap into the Indian subconscious. That this shift has something to do with the more than 65% slump in gold imports recorded in the first half of this year in the world's top bullion-consuming country, should be quite obvious.
Well, at least something is being done about the matter. As one Indian jeweler in Vancouver put it last night: "Well, now if they can only do something about the price of the metal..." Someone, somewhere is trying to do something about the price of black...gold as well. Bloomberg reports that the US "Congress may outlaw elements of oil futures trading that lawmakers found distorted demand and contributed to the 69 percent surge in prices in the past year. The headline reads: "Congress Pursues $80 Oil With Trading Limits, Disclosure Rules" - It is estimated that absent the fallout from aggressive speculation, the price of the commodity would indeed be nearer $80 per barrel.
Bloomberg's Millie Munshi reports that the flashing exit signs she first detected in the middle of last week in the commodities' complex have intensified their rhythm this week and could be showing the pivot point we have been alluding to recently. Though we will not know with certainty until about two months from now, the developments are most certainly worth learning about:
"Commodities dropped to the lowest in seven weeks as a stronger dollar and rising equity markets eroded the appeal of oil, gold and corn as alternative investments.
The UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials fell for a second day, touching 1,527.441, the lowest since June 5. Corn was the biggest loser, dropping as much as 5 percent, and crude oil extended its slide from a record this month, while gold dropped to a two-week low. The dollar rose to a four-week high against yen and gained against the euro as investors increased bets the Federal Reserve will raise interest rates in September. The Dow Jones Industrial Average added 3.6 percent last week, while the UBS Bloomberg index plunged 7.3 percent, the biggest slide since March. Some investors buy commodities as a hedge against inflation.
"It all has to do with the dollar, inflation and interest rates," said Michael K. Smith, president of T&K Futures & Options in Port St. Lucie, Florida. "With the dollar gaining and less concern about inflation, people don't want to buy commodities anymore. People are shifting into stocks."
Shares in Asia, Europe and the U.S. climbed. The MSCI World Index rose as much as 1 percent in New York.
"Commodities were a bubble and stocks were too cheap and now we are seeing a shift in investments," said Greg Grow, the director of agribusiness for Archer Financial Services in Chicago. "It could be a long time before commodity positions are completely unwound."
Commodities also dropped today on concern that slumping global growth may curb demand for raw materials. Merrill Lynch & Co. economists yesterday cut their forecast for U.S. growth. China's economy in the second quarter expanded at the slowest pace since 2005, a report showed last week.
"The world is in recession already," investor Marc Faber, who forecast the so-called Black Monday stock-market crash in 1987, said today in an interview with Bloomberg Television. "I put out a negative view for industrial commodities for the second half of 2008 and I stick to this view."
Oil declined as the U.S. government reported a weekly gain in inventories of gasoline and distillate fuels, which include heating oil and diesel. Gasoline supplies increased 2.85 million barrels to 217.1 million barrels in the week ended July 18, the Energy Department reported. Inventories of distillate fuels rose 2.42 million barrels to 128.1 million, the department said in its weekly report.
Hurricane Dolly strengthened over the Gulf of Mexico, and may become a Category 2 storm before making landfall near the Texas-Mexico border, the U.S. National Hurricane Center said today. Oil fell earlier after Dolly was forecast to miss most Gulf oil rigs. The region accounts for 25 percent of U.S. crude production.
Crude-oil futures for September delivery traded at $126.92 a barrel at 11:53 a.m. on the New York Mercantile Exchange after falling as much as $3.11, or 2.4 percent, to $125.31 earlier.
"With the stock market strengthening and oil giving off sell signals, every single commodity is down," said Ron Goodis, a futures-trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. "Interest rates are going higher and that's a scenario for a drop in commodity prices."
Gold for August delivery dropped as much as 2.8 percent to $921.70 an ounce on the Comex division of the Nymex. Corn for December delivery on the Chicago Board of Trade slid to as low as $5.6275 a bushel, the lowest since April 1. Copper dropped as much as 2 percent, coffee lost as much as 1.9 percent and soybeans fell as much as 3.3 percent.
"All of these commodities are starting to show signs that the big bull market is over, and the things that people have really made the most money with in the past seven years will start to substantially drop," Michael Aronstein, president of Marketfield Asset Management in New York, said last week."
Watch for any breach of $920 or $915 and look out for the absence/presence of bargain hunters as they will prove essential to the next direction in prices.
Happy Trading.
Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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