29 April 2011 at 13:29 GMT
This week’s announcement from the U.S. Federal Reserve that QE2 will cease in June but will be followed by an extended period of low interest rates was what the market had been hoping for. As a consequence the dollar continues its slide towards the bottom while supporting the continued bull markets in equities and commodities.
The Reuters Jefferies CRB index is flat in the week but showing a positive return of 10% year to date, which is rather impressive after just four months. During the same period, however, the dollar has lost nearly 8% versus a basket of currencies which leaves non dollar based investors nearly flat year to date.
Easy monetary policy has speculators piling into silver and gold
Currently there seem to be no clouds on the horizon when it comes to investing in gold and silver. Prolonged low U.S. interest rates, which carry the risk of triggering higher future inflation, and a weaker dollar, combined with the sheer momentum of investor money continuing to pile into the metals, have driven both to new highs during April.
During this week silver broke some amazing records. First of all it reached the Hunt brothers’ high from 1980 just below 50 dollars. On Monday the trading frenzy saw the iShares Silver Trust ETF trade more volume than the SPDR S&P 500 ETF, normally one of the most actively traded securities in the world. Futures volumes also exploded as the CME Group reported a turnover of 319,205 contracts, a 58.6% jump from its previous record in November.
Some of the volume was undoubtedly the result of short covering with short sellers capitulating amid the ongoing surge which saw silver rise by 25% in just eight trading sessions. Daily trading ranges during the past week have been between four and nine percent which makes it increasingly difficult to trade with the $45 to $50 range not expected to hold for long. The fundamentals and momentum continues to support precious metals but heavy bouts of profit taking are always a danger. Near-term silver support can be found at 45 followed by 42.
The move in gold has been much slower with silver continuing to outperform. Against the other major currencies the performance year to date has been pretty flat with EURO gold showing a negative return of 2.5%. Central Banks continue to favour gold with former sellers having turned into buyers and this combined with negative real rates continues to support gold. Support can be found at 1,490 before major at 1,455.
Gasoline the driver
U.S. gasoline prices continue to be the upside leader outperforming crude oil. This week the price jumped to a 33 month high with 10 straight weeks of inventory declines bringing to their lowest levels since August 2009. As a consequence the U.S. retail gasoline price at the pump reached $3.88 per gallon, only some 5% below the 2008 peak. This inventory decline and price rise has become a hot potato, both politically and financially as the driving season is only a month away.
Crude oil still supported by events
The factors that have driven the price of Brent crude up by 31% this year have not gone away. Unrest in North Africa and The Middle East has not diminished with Libyan oil still not expected to reach the market for months. Add to this a weak dollar and stubbornly strong Chinese demand, which in March rose by 10.6% year on year to 9.1 million barrels per day.
What could pull prices lower are fears that the recovery may be slowing down as seen through weaker than expected U.S. growth during the first quarter. ARAMCO in Saudi Arabia was out this week expressing their concerns about high prices and the potential impact on global growth. Meanwhile the speculative position held by hedge funds and large investors is back up to 300 million barrels representing a nominal value of $34 billion.
Near term Brent crude is confined to a trading range between 119 and 127 per barrel.
Weather is playing havoc with grain planting and prospects
As mentioned in previous updates the main market driver for the grain markets over the next couple of months will be weather developments across growing regions. Last week we saw strong performance from wheat as dry weather conditions in southern U.S. states, Canada, France, Germany and China drove prices 10% higher before improved forecasts sent the price crashing back down by the same amount.
Corn has been affected in a similar fashion but this time by too much rain across the U.S. Midwest which has been hampering spring planting and putting additional pressure on always depleted stock levels. But again, just like wheat improved weather forecast saw prices fall heavily on Thursday. This highlights the weather volatility ahead. It is no wonder that the grain traders on the old futures pit in Chicago allegedly used to sleep with one foot outside the window to be the first to know of any change in weather patterns.
Cocoa recovering from lows
Cocoa priced saw sharp gains this week on concerns that tensions in the Ivory Coast could reignite. The recovery has now seen the market retrace more than 50% of the March sell off.
Sugar continues to slide
The February peak at 29.75 is now only a distant memory as sellers have been in the driving seat during April. Thailand, the world’s second largest exporter after Brazil, expects a bumper crop of 9 million tonnes, up 30% from last year. Potential exports from India, combined with good weather prospects in Brazil, have helped sellers while the speculative long position is still relatively high at 122,000 lots, albeit down from 200,000 lots in February.
Cotton demand waning
Cotton, the star performer over the past year, has seen a sharp reversal during April as high prices have begun to strangle demand at a time where global supplies are climbing. China, the largest cotton importer has increasingly been cancelling orders which in turn have helped remove some of the deficit in the market. One thing to look out for is U.S. planting, which is behind schedule due to the hot dry weather conditions which have also impacted wheat.
Coffee above $3
The price of high quality Arabica coffee has breached $3 per pound for the first time in more than 34 years with investors and roasters competing for limited supplies. Inventories are at a 50 year low with espresso connoisseurs craving for the high quality bean continuing at a time where supplies from Columbia and other top producers have been disappointed.
Copper on growth watch
Copper has been trading sideways with a slight downward bias over the last three months. Worries about continued tightening of Chinese monetary policy and a general reduction in global growth expectations on the back of high energy prices have been the main focus. Stockpiles in China, the world’s biggest consumer, have been rising aided by Chinese investors who to a greater extend have been using copper as collateral for loans. Overall the composite index of base metals is showing a small gain on the year with negative performances in lead, copper and zinc more than offset by strong gains in tin, aluminum and nickel.
Natural gas working on the floor
More than six months of sideway trading has begun to incite the belief that a floor below $4 has been established. Open interest on the futures is near a record high, while the large speculative short position held by hedge funds and large investors is stuck at close to 200,000 lots. The Japanese nuclear disaster has increased the use of natural gas with U.S. nuclear output seeing a reduction while 23 U.S. reactors, with similar design to the Fukushima nuclear plant come under review. During this past week nuclear power output dropped to the lowest level in 10 years after tornadoes slammed into the southern states knocking out power plants. For now the spot month stays range bound between $4 and $4.8.