Commodities are being driven by macro-economic events.
The price of Gold continued to climb last week after finding its low at 1155.6 on July 28. The rise last week was supported by speculations on the US FED’s renewal of Quantitive Easing and China’s relaxation of rules in Gold trading. The front month benchmark contract closed above US$1200 oz. for the first time since July 16 last Friday.
The WTI Crude Oil price resumed its rally after breaking above the resistance at US$80 early last week. The price ran to US$82.97 on the high after a report showed that US Crude Oil inventory dropped more than expected. The price then retraced later in the week as weak US data prompted worries over economic slowdown. The front month contract dipped Friday day after weaker than expected employment data was reported, but price managed to hold above the 80 mark.
The biggest news on the Commodity Market is Russia’s ban on Wheat exports. Fear of food shortage drove Wheat price higher and spurred inflationary worries. On Friday, the benchmark CBOT Wheat futures rallied to a 2 yr high of 841 before declining on profit taking to 725.75 at close.
Gold
Comex Gold recorded its 1st weekly increase in 4 on speculations that the US Fed will engage in a 2nd round of QE.
It is expected that the QE measures will not be large, but nevertheless the Fed’s move will be influential to interest rates, lower, longer, and positive for Gold price.
The upcoming FOMC meeting will likely be a near-term catalyst for further rise for Gold’s price. Certainly, if it turned out to be a non-event or the Fed send no signal of QE measures in the futures, Gold price may weaken.
Now for China’s influence on the price of Gold: The People’s Bank of China (PBOC) released a statement last week and reported on LTN saying that it will allow its banks to export and import more Gold and hedge their positions in Gold in overseas markets, and that will also encourage Gold derivatives to be denominated in RMB and develop the Gold leasing market. The opening up of the Gold market in China (the World’s largest producer) will ignite domestic demand and increased investment channels thus positive for Gold’s price.
As noted above, China is the World’s largest Gold producer and its 2nd largest consumer, but its Gold market is in deficit, and depends on external sources to satisfy the needs.
Currently the Chinese central bank is the World’s 6th largest Gold owner, with 1054.1 tonnes as of June 2010. Such holdings represent just 1.6% the country’s total Gold reserve. If China is to increase its holdings comparable to its Asian counterparts, it will need to increase holdings by almost at least 50%. For instance, Singapore has Gold holdings of 2.4% of total reserves.
PGMs erased part of the gains made in previous weeks, but we here at LTN believe the fundamentals point to constructive prices support. The latest news from South Africa said that its National Union of Mine Workers will reach a deal with Impala, the World’s 2nd largest producer, this week, members were split on whether to strike or not. In fact, and recall that other issues impacting the country’s long-term production prospect are power outage and safety standards.
The Overall Technical Outlook for Gold
Comex Gold (GC)
Gold’s rebound from 1155.6 extended last week and broke the 1203.9 resistance level indicating a short term bottom was formed. So, initial bias now is mildly on the Northside this week for 61.8% retracement of 1266.5 to 1155.6 at 1224.1. I do expect strong resistance a above that number and below the 1266.5 high to bring another decline.
On the Downside: a break below 1192, the minor support will flip intra-day bias back to the downside for targert of 1155.6 and below.
The Big Picture: Gold’s rally from 1044.5 should have completed at 1266.5, and the whole medium term rise from 681 might have finished with 5 waves up on bearish divergence condition in daily MACD. A break below 1155.6 will bring deeper correction IMO to 1044.5 cluster support, i.e., 38.2% retracement of 681 to 1266.5 at 1042.8 or so. I believe that risk remains strong to the Southside as long as the 1266.5 high mark holds.
The Long Term Picture: I believe that 1266.5 is an important medium term Top in Gold, and expect to see a deep correction from there, and a breach of 1000, the Key psych level is possible. Having said that, there is no indication of long term up-trend reversal in here. So, I will maintain my long term Bullish POV, and expect whole up-trend from 1999 low of 253 to continue to 100% projection of 253 to 1033.9 from 681 at 1462 level after completing the correction from 1266.5. Stay tuned…
Crude Oil
The market appeared to be a bit more optimistic on the Energy Sector despite the slowdown in the USA Data released in July displayed a stronger market outlook at a 1st glance, as the Oil Market Intelligence’s preliminary data showed that total product demand from OECD and non-OECD countries rose to the highest level since Q-1 Y2008 while the annual growth exceeded +2%. According to the EIA, Gasoline demand since the beginning of the driving season has been stronger than last year. Preliminary data for June and July consumption for motor Gasoline rose +1.95% y/y. Year-to-date gasoline demand climbed +0.2%.
Players should note that the data may be subject to downward revisions however. The EIA released it monthly and annual petroleum supply report last week. While Crude Oil demand for Y 2009 was revised up, the monthly data for May surprised to the downside. Total crude oil product demand dropped for a second ward to 18.827M bpd in May. Such reading was reduced by more than 800K bpd from initial estimates. On the other hand, distillate demand was lowered, by +363K bpd, to 3.625M bpd in May. Note that the good news is that Gasoline demand was revised up slightly by 61.5K bpd in May.
Despite what may be a positive Gasoline market in here, I do not believe that it can sustain in the 2-Half of this year.
Why?
1) strong base effect as demand rebounded in the last few months of Y 2009 should cap year-over-year growth in demand.
2) inventory remains too ample for consumption to erase, and
3) weak employment should cause consumer confidence to fall, thus dampening driving in the USA.
The Overall Technical Outlook
Nymex Crude Oil (CL)
Crude Oil moved North to 82.97 last week but retraced into the close on Friday. My work now shows what looks to be a temporary Top, and initial bias is Neutral this week. I do see more Southside action coming. But, please note that another rise remains a possibility as long as the 75.90 Key support level holds.
A break above 82.97 will target 100% projection of 64.23 to 79.38 from 71.09 at 86.24 next, and a break of 75.9, the Key support now, will be the 1st signal that whole rebound from 64.23 is done, and will turn the target to 71.09 to confirm.
The Big Picture: there is no change in the view that rise from 64.23 is a correction to fall from 87.15 only in my POV, even in case of more rallying, I expect strong resistance below the 87.15 high and to bring on a reversal.
On the Downside: a break of 71.09 will be the 1st signal that fall from 87.15 is resuming for another low below 64.23 towards 50% retracement of 33.2 to 87.15 at 60.18
The Long Term Picture: this curren development augurs that therebound from 33.2 finished at 87.15, inside 76.77/90.24 fibo resistance zone as I expected.
My POV is that the fall from 87.15 would develop into the 3rd falling leg of the whole correction from 147.27 and therefore I look for an eventual break of the 33.2 low in the long term as such correction extends. Stay tuned…Paul A. Ebeling, Jnr. www.livetradingnews.com
