North American Commodity Update Commodities – Energy A Volatile Session for Crude Mimics the SP 500’s Reaction to News of Ireland’s Bailout Crude Oil (LS Nymex) – $81.74 // $0.23 // 0.28% The expiration of the Nymex December crude oil futures contract presents an unusual picture when reconciling the rollover. However, should we look at a continuous contract, we would see that the commodity has in fact put in for a modest improvement over Friday’s close. However, this was not a slow shift by any means. A wide range bar with relatively narrow close between open and close suggests there was a lot going on in the background. For the astute fundamental traders, it wasn’t difficult to identify the culprit for market movement to begin the week: risk appetite trends. News of Ireland’s request for financial support wouldn’t shock too many global investors; but the announcement would nevertheless force market participants to account for the inevitable shift. That said, it seems like the US oil market is still waiting for its real move having formed a clear measure of congestion above notable support seen at $80. But will this market be able to find anything more than volatility on this trading week? Taking stock of the fundamental drivers for the day, between the macroeconomic expectations for supply-and-demand and risk appetite considerations for the commodity, it was clear what would be the most pressing driver to respond to. Ireland’s decision to ask for assistance from the EU and IMF was far from a surprise; but nonetheless, it is an admission that conditions are deteriorating for another European Union member to the point where they can no longer sustain themselves. Why does this impact oil? With both Ireland and Greece requiring financial assistance, the entire European Monetary Union seems close to a regional crisis. And, should conditions start to breakdown for this prominent economic player – it is highly likely that the ripples are immediately felt worldwide. What happened in the last global financial crisis? Investors withdrew capital from all markets stained by risk – and crude proved one of the most susceptible. This could very well be the cards for the commodity going forward. Looking at the position of key sentiment gauges (the SP 500 and EURUSD), it is clear that there is still a measure of clarity on Europe’s stability that need to be answered before traders unload or add to oil positions. The details will trickle in; but they won’t really generate meaningful confidence in the long-term outlook. In the meantime, the extended holiday weekend in the US will disrupt trading activity for the Nymex Light Sweet crude contract. Perhaps the heavy hitting data on the calendar between now and the liquidity drain will fill in the gaps. Today, the Chicago Fed’s National Activity advanced modestly – perhaps a prelude to tomorrow’s second reading for US 3Q GDP. In addition to US economic health, we will also see the final readings on German growth as well as more timely PMI activity indexes for the Euro Zone. Chart generated using FXCM Strategy Trader Commodities – Metals An Irish Bailout Undermines the Euro, Helps Gold’s Position as an Alternative Store of Wealth Spot Gold – $1,366.45 // $13.52 // 1.00% Gold advanced for a third day through Monday’s close – extending the bounce from critical support that was fortified last week. Yet, despite the net changed for the day, there was a notable lack in volatility for the precious metal – a significant deviation from the higher volatility of equities. Gold is far from the highly-reactive asset that equities are; but the connections are nonetheless remarkable. Yet, where equities investors are still waiting to see whether they are going to be encouraged by government guarantees in Europe and the US; metals traders see the implications for inflation, currency depreciation and the long-term growth and financial implications. As per usually, a lack of conviction in standard asset classes (not necessarily bullish or bearish, but a general lack of stability) will lead to an innate demand for gold. Looking at fundamental drivers for the day, the advance from gold can be easily tied to the bailout from Ireland. However, the lack of real surprise in this outcome is similarly responsible for the lack of volatility from the market. From the moment officials from the Island country refused to ask for financial aid at the EU’s last monthly meeting, speculation that the issue would be forced set in. With EU, ECB and IMF officials flying into Dublin to assess the health of the nation’s banking system, it was clear that officials were taking the next step in their political insistence. So, when over the weekend Ireland’s Prime Minister announced he had asked for aid (which would amount to under 100 billion euro’s according to his assessment); few were caught off guard. Yet, the market’s general reaction was still up in the air until then. That said, the spike in volatility, the drop from the euro and the rally in credit default swaps for other ailing EU member economy clearly marked the worry that would not be soothed by yet another bailout. The added debt to Ireland’s books, the threat that financial stability is starting to deteriorate across Europe and the blow to the euro’s legitimacy all redirect capital away from the dollar’s primary substitute and back into the waiting arms of the precious metal. It will be interesting to see how far this impact goes as it was largely priced in and US liquidity is scheduled to drain for the holiday weekend Wednesday evening. For those watching trading activity, the December Comex futures contract saw volume actually drop by 4 percent to 159,984 contracts from Friday – to the lowest level since November 2nd. Trading is already thinning despite the otherwise remarkable fundamental shocks that the market is being delivered. At the same time ETF holdings was little changed on the day (at 67.02 million ounces) though it is interesting to note that exchange traded products carry 9 years worth of US output according to Bloomberg News. Spot Silver – $26.17 // $0.53 // 2.07% Not only is silver a cheap proxy for gold and a favorable risk-based asset; but it is also a market that many believe is being cornered by deep pockets. This isn’t too outlandish a statement when we consider the commodity rose for the fourth session to its highest close since 1980. That said, volume on the December contract did drop 16 percent from Friday to 70,895 contracts. Discuss gold and oil trading with other traders in the DailyFX Forum Written by John Kicklighter, Strategist To receive John’s reports via email or to submit Questions or Comments about an article; email jkicklighter@dailyfx.com

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