The major commodity sectors all saw small setbacks during the week which to a certain extent was driven by some profit-taking following rising markets during the early parts of August. US bond yields rose to a two-year high as the US Federal Reserve remains on track to begin tapering its asset purchase program on September 19, China’s manufacturing activity improved in August while emerging markets witnessed a barrage of selling of its bonds, equities and currencies.
Precious metals were stable with gold holdings in exchange traded products (ETP) remaining unchanged for a second week despite the continued rise in bond yields and Fed tapering talk. The heightened volatility and sell-off in emerging markets lend support while silver took a breather and in the process underperformed gold following a 30 percent rally from the June low.
Energy markets were mixed with US natural gas rising due to extra demand caused by hot weather. Brent crude was stable despite continued focus on the geopolitical tensions in Middle East North Africa while WTI crude’s discount widened back to five dollars which is more in line with fundamentals.
Industrial metals, led by nickel, were all lower despite improved manufacturing data from China and signs of the global recovery gaining some momentum. Following a strong rally over the past four weeks, some consolidation was due but with improved economic data from China, Europe and US all pointing towards a potential pick-up in demand, support should not be far away before another upside attempt is seen.
The biggest losers were seen among the soft commodities with cotton seeing its biggest three-day fall in two years while the downtrend in coffee resumed and sugar also fell back towards key support. Ample supplies after good growing conditions this year has led to renewed price pressure, just like we witnessed in key crops such as corn and soybeans. At least until this week that was, with both recovering as hot and dry weather in the US Midwest may cause a reduction in yields when harvest begins in a few weeks’ time.
The price of Brent crude oil remains glued to $110 per barrel. Planned and unplanned supply outages from both within and outside of OPEC has tightened oil markets without causing higher prices while additional support has been coming from MENA unrest and improved economic data raising the prospect for increased demand. Up against this we are fast approaching the time of year where demand for crude oil from refineries will begin to slow as people return to work following the summer driving season. The port strikes in Libya which have dramatically reduced the country’s export capability during August are showing signs of easing which also helps to keep a lid on the price. Hedge funds maintain a near record long position in anticipation of further price appreciations and as we move closer to the lower demand season, some long liquidation may be seen.
We are currently seeing a repeat of the seasonal pattern of higher prices during August which in both of the previous two years has been followed by a drop during September and October. Before that time, Brent crude may just have another attempt to the upside but we expect such a move to run out of steam towards trend line resistance, currently at 113.75 dollars per barrel before eventually moving back towards the 100 to 105 dollar per barrel range.
The spread between Brent and WTI crude oil widened out to five dollars per barrel as WTI succumbed to selling on the above expected slowdown in demand following the official end of the driving season on September 2 together with news about the pick-up in Libyan exports. We expect WTI to remain range bound between 101.50 and 108.00, a range which has capped the market since early July.
Gold has shown a great deal of resilience holding above support at $1,350s per ounce despite the continued rise in bond yields. US ten-year bond yield has moved close to three percent, a level that was last seen more than two years ago. Support has come from the financial market turmoil in emerging economies, geopolitical tension in Syria and Egypt together with the fact that gold holdings in exchange traded products has been stable for a couple of weeks which could be taken as a sign that most of the institutional selling may be over or at least paused.
While we do not envisage a strong recovery from here, the market looks better balanced now than we have seen all year. This leaves the door open for some additional short covering which could carry the price higher to an initial target of $1,415 per ounce. But being balanced also means that renewed selling cannot be ruled out with sentiment still a bit fragile so keep an eye out for a potential break which carries the risk of further price weakness initially retreating to $1,315.
One current worry for the gold market is the continued rise in US real yields which has led to a decoupling in the correlations between gold and yields and it raises questions about the sustainability of the current recovery and about which one of the two eventually will have to give?
Silvers rapid rise has halted following a breathtaking 25 percent jump in less than ten trading days and this week the metal spent most of the week consolidating within a relative tight range. Improved economic news out of China has triggered a revival among industrial metals such as copper, platinum and not least silver given its plus 40 percent use as an industrial metal.
Against gold its out-performance has been halted once the ratio reached 59 ounces which correspond with trend-line support going back to April 2011. A break below that level could signal not only additional support for gold but also the potential for silver to move towards a ratio of 55, another 7 percent worth of out-performance.