- Yellen seemed hawkish at first but then morphed into a dove
- Gold and oil gained – speech lacked new initiatives or direction
- Gold, however, was still largely unchanged on the week
- Precious metals were on the defensive during the long Fed wait
- Supply fears push zinc's year-to-date gain to 48%
- Market seeks confirmation that gold rally can be sustained
- Oil calms down as market ponders the possibility of an Algiers deal
The wait for this lady had markets on tenterhooks all week. Pic: Paul Morigi/Creative Commons
By Ole Hansen
Commodities traded lower during a week where most of the attention was focused on the August 26 speech by Fed chair Janet Yellen. The annual economic symposium at Jackson Hole – the Davos for central bankers – has in past been used to signal major initiatives by the US Federal Reserve.
The market reaction following the speech was initially negative but soon reversed as no new initiatives or direction was seen. The dollar has been on the defensive since June as riskier currencies together with stocks and bonds have been in demand amid the wall of central bank money that is flushing around the financial markets.
In the end Ms. Yellen delivered a speech in which she wanted to talk up the odds of another rate hike. She stated that the US economy is nearing its goals on inflation and employment, making the rate hike case stronger. Longer-term signals, however, were less hawkish and more dovish as Yellen stated that the Fed's ability to predict the rate hike path is limited. The market responded by taking precious metals and stocks higher while the dollar was left almost unchanged.
Precious metals and industrials mixed
Precious metals spent the week ahead of the speech on the defensive with hedge funds extending what has so far been light selling into a sixth week. On the other hand, investors using exchange-traded products backed by gold were light buyers. Following the speech gold returned to being unchanged on the week while silver clawed back earlier losses.
Industrial metals were mixed with zinc extending its gain for the year to 48%. This on continued worries that dwindling mine production and strong demand could leave a shortfall. The opposite can be said about copper where rising production and rising inventories together with a continued slowdown of imports into China has left the price close to critical levels.
Natural gas continues to recover as warm weather in the US has triggered record demand from power plants. This increased demand has reduced the weekly injection of excess production into underground facilities thereby further reducing the risk that capacity could be hit come October. This is the month which signals the end of the injection season before the annual extraction begins ahead of and during the winter months.
Gold treads a narrow path
Gold drifted lower while silver and platinum both were hit harder ahead of Yellen's speech. It's become increasingly apparent during the past couple of weeks that the precious metals market is running out of steam. However, in the case of gold the losses have so far been limited. Just like back in May (when gold last corrected) we have seen hedge funds as net-sellers for the past few weeks while investors using exchange-traded products have been buying into the weakness.
Following the post-Brexit surge gold has settled into a relatively tight range with the market gravitating around $1,340/oz. While the underlying fundamental support from compression of global interest rates continues the market has increasingly been looking for confirmation that this year's strong rally can be maintained.
When it comes to the direction of the dollar - an important driver for gold - traders have increasingly been signaling uncertainty about what leg to stand on. This has resulted in a ten day period where EURUSD has been range-bound within a €1.1250 to €1.1350 range. During this time gold has generally been falling more on dollar strength than rising on weakness and this has been the main sign illustrating the current buying fatigue.
After Janet Yellen's speech at Jackson Hole gold returned to $1340 after holding trendline support at $1320 and the key area of support between $1,315 and $1,300:
Oil calms down after yo-yo drama
Oil calmed down following a couple of dramatic weeks where the cost of a barrel of oil had fallen by more than 20% on short selling before rising even faster by 24% on an even more aggressive round of short-covering. Daily trade inspiration has been provided by the current tug of war between challenging near-term fundamentals and Opec members pondering how to support the market.
Several Opec members, including Saudi Arabia, has expressed an interest to meet at the fringe of the International Energy Forum in Algiers from 26-28 September. This forum brings together ministers, CEOs, international organisations like Opec and the IEA and experts from 73 countries.
The big question remains whether a deal can be struck given that key players such as Iran still reserve the right to continue to increase production. If a deal were to be struck it would initially be taken positively as the first sign that Opec members are actually able to support the price by more than verbal intervention.
Brent crude oil's return to $50/b has triggered a pickup in hedging activity from oil producers, especially US shale oil producers. This, combined with the continuous rise in the number of oil rigs in the US during the past three months, as well as the continued overhang of supply, will likely continue to cap the upside potential to the low 50s over the coming months.
Crude oil has stabilised following the short-covering surge sparked by Saudi freeze comments. Further upside above $50 likely to be limited ahead of September which has been a challenging months for the past five years.
– Edited by Clare MacCarthy