With a few more days to go before we get any deets on the Jackson Hole meetings, I thought we could check in on what’s been happening to the major commodities lately.
For trading newbies out there, you should know that commodity prices can affect currency price action. In fact, commodity-related currencies like the Aussie, Loonie, and Kiwi often take cues from commodity prices trends.
Here are short updates on gold, crude oil, and iron ore that you need to know:
Gold rally continues
It’s been almost a month since we’ve discussed the reasons why comdolls are trading higher but it doesn’t look like the trends have changed much since then.
Remember that gold is seen as a “safe haven” to buy in case of risk aversion. These days the yellow metal has been receiving support from shakeups in the White House and concerns that the Donald might not be able to fulfill his pro-growth agenda.
It also doesn’t hurt gold that attacks in Paris, Barcelona, and even the U.S. AND threats of a nuclear war with North Korea have increased global security anxieties. And then there’s the decreased chances of a third Fed rate hike, which has turned the dollar-gold correlation in favor of the commodity.
Speculators haven’t been this bullish on gold since October
According to CFTC’s Commitments of Traders report printed last Friday, speculators such as hedge funds and money managers have been increasing their gold holdings for a fifth straight week.
Net long positions in gold GC27 rocketed by 30% in the week ending Tuesday to 179,537 contracts from 138,566 the week earlier.
Not only does this mean that gold holdings have expanded eight-fold in the past five weeks, but the level also marks the highest level of net longs among speculators since October. Wowza!
Ray Dalio wants you to buy gold
In a LinkedIn post two weeks ago, Bridgewater Associates (the world’s largest hedge fund) founder and rock star trader Ray Dalio recommended that investors allot 5% – 10% of their portfolios to gold holdings.
Dalio noted “[t]wo confrontational, nationalistic, and militaristic leaders playing chicken with each other” and Congress possibly failing to increase the debt ceiling as market risks that “do not appear appropriately priced in” just yet.
He also noted that gold would likely benefit more than other safe havens like Treasuries or the yen. However, he added that they “don’t have a unique insight that we’d choose to bet on” and warned traders to “stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes.”
$1,300 technical resistance
Before you buy the yellow metal like there’s no tomorrow, you should know that the asset is knocking on a key technical resistance.
The precious metal is currently at $1,285.20, which is a hair’s breadth away from the $1,300 mark that kept the bulls at bay back in April and June. Will we see another rejection at the level? Or an upside breakout that could push it to its previous highs near $1,350.00?
Tightening physical market?
A Reuters poll shows that U.S. crude inventories are expected to have fallen for an eight consecutive week to 3.4 million barrels. Meanwhile, PetroLogistics – firm that tracks OPEC oil shipments – says that OPEC oil supply is set to fall by 419,000 barrels per day (bpd) this month.
International Energy Agency and OPEC also signal good things on the demand side. The former expects global oil demand to hit 1.5M barrels per day (up from 1.4M in July) while the latter expects a demand of 1.4M bpd this year.
But is the market really tightening? U.S. crude production just broke through 9.5M bpd, its highest since July 2015, while increased output from Libya and Nigeria pushed OPEC output higher by 173,000 bpd in July.
All hope is not lost though. Data last Friday showed that U.S. energy firms cut drilling rigs by the largest amount since January while U.S. commercial-grade inventories have also fallen about 13% from their March highs to 467M barrels.
If this week’s reports show sustained downtrends for inventories, then we might see the Black Crack edge higher across the board.
Divergence between Brent and WTI bets
Data from the CFTC’s COT report showed that speculators have eased up on their net bullish positions on U.S. crude for a second straight week after five straight weeks of gains. Meanwhile, data from the InterContinental Exchange showed speculators raised bullish Brent crude bets last week. What’s up with that?!
The answer may be in oil supply outlook. Crude output at major shale fields in Texas and North Dakota are set to reach record highs next month even as U.S. inventories decline. Meanwhile, a meeting in Vienna this week is expected to result in higher OPEC deal compliance in August.
Expectations of higher oil supply has weighed on shorter-dated WTI futures. This is typical of a glut because some buyers are willing to pay more for future deliveries to avoid storage and insurance costs for barrels they don’t immediately need.
Conversely, demand for shorter-term Brent futures is increasing, so much so that the benchmark is selling at a premium relative to its longer-term contracts.
October delivery for Brent ended Friday at a $4.06 premium to WTI for the same month, the widest gap since September 2015.
The spread narrowed to $3.93 on Monday though. As of writing, Brent crude oil is trading at $51.97, while U.S. crude oil prices is still sub $50 at $47.74.
In case you were too busy looking at your bitcoin gains, you should know that iron ore prices have rocketed faster than a Westerosi raven can deliver messages.
Stars aligned for iron ore
Analysts point out that one of the possible reasons for iron ore’s rally is that traders had been too pessimistic on its outlook earlier this year.
If you recall, market players had predicted slower growth for China’s economy, something that was avoided due to government spending and easy monetary policies.
There’s also the issue of production. Some point out that companies are simply ramping up production ahead of the winter months when policymakers are set to limit manufacturing to contain pollution. Winter is coming indeed!
The next one is increased margins for steel producers. As global and domestic demand pick up and with steel prices rising faster than input costs, Chinese companies are incentivized to increase steel production, which further increases the demand for iron ore.
Last but not the least is speculation. With prices rising quickly and steadily, speculators have bought iron ore futures like it’s going out of style.
Road bumps ahead
While iron ore demand is expected to be resilient ahead of a leadership transition in Q4 2017, some analysts have pointed out that a rebalancing is in the works.
Iron ore prices could be in for retracements (if not a reversal) as high inventory levels eventually catch up to the markets. Of course, it also won’t help that the winter months (and its limitations) will soon lessen the demand for iron ore.
And then there’s a possible unwinding of speculative longs, which could always happen when buyers eventually run out of steam.