Baku, Azerbaijan, March 13
By Anvar Mammadov – Trend:
Industrial metals slumped to a 12-week low, oil drifted lower as the focus turned to rising supply focus while profit taking hit key crops following the recent weather related surge, Ole Hansen, head of Commodity Strategy at Saxo Bank, told Trend.
“Gold also went looking for support after failing for a second time in two weeks to break above resistance at $1340/oz,” he said. “Additional weakness was seen ahead and after Friday's strong US jobs report and after hopes of easing tensions between the US and North Korea helped send the yen lower against the dollar. A May meeting between Trump and Kim Jong Un could be the breakthrough needed to ease nuclear tensions on the Korean peninsula.”
“Gold has settled into a 40 dollar range between $1300/oz. and $1340/oz. with the negative impact of the recent rise in US real yields being offset by the positive impact of a stronger Japanese yen. Increased stock market volatility has also played its part in recent gold gyrations. Trump’s initial tariff announcement sent stocks lower and gold higher only to weaken again as the stock market recovered when a watered down version was announced. US real yields – the yield you will earn after inflation – have almost doubled since the beginning of the year. Offsetting this negative development for gold has been the weaker dollar, especially against the Japanese yen,” Hansen noted.
Adding to the mix was Friday’s jobs report, the last before the March 21 Federal Open Market Committee meeting, according to the expert.
“A Goldilocks report showing strong job growth and lackluster inflation left the door wide open for a sixth rate hike and potentially also a hiking of the forward guidance. The previous rate hikes in this current cycle which began in December 2015 have so far triggered a repeat pattern of gold weakening ahead of a FOMC meeting only to rise strongly once the rate hike was announced,” Hansen said.
“A continued rise in rates is unlikely to derail gold's ability to move higher. Not least if higher rates are caused by the wrong kind of inflation i.e. one that is driven, for example, by rising prices due to import tariffs instead of demand-based inflation. We maintain a constructive view on gold, especially given its ability to withstand the recent jump in real yields. Its range-bound nature, however, is likely to continue ahead of the March 21 FOMC meeting with nervousness about the rate hike being offset by the risk of rising global trade tensions,” he added.
Industrial metals with the exception of nickel are all trading down on the year with the risk of trade wars now adding to the existing nervousness about the short- to medium-term outlook for growth and demand in China, noted the expert adding that this occurs at a time when China’s transition from the old economic model to a new and less commodity-intensive economy could take its toll on demand.
“HG Copper’s strong surge from the 2016 low has been running out of steam during the past few months with the price struggling to break above resistance at $3.30/lb, the 50% retracement of the 2011 to 2016 selloff. For now the price remains stuck in a range with support just below $3/lb,” Hansen said.
He added that natural gas has spent the past few weeks recovering after once again finding support at $2.50/therm.
“A colder than normal winter has led to robust demand which has helped offset record production,” the expert said.
“Cocoa, up 30% year-to-date, surged higher to reach a 16-month high with the Ivory Coast Cocoa Board reported to have oversold the bean as production continues to suffer from drought,” he added. “Cotton was supported by unusually strong export demand and an escalating drought in Texas which can cause planting problems. In the latest update on supply and demand from the US Department of Agriculture these developments helped trigger a price supportive downwards revision of US ending stocks. The DoA report also gave corn a boost from a surprise drop in domestic stocks on rising export demand after dry and hot conditions took a toll on the crop in Argentina, the No. 3 global corn and soy exporter.”
“The dramatic rally across the grain and soy sector since mid-January has to a large extent been speculative driven. During a six week period from January 16 to February 27 funds went from holding a combined record short across six grain and soy futures of 480,000 lots to a net-long of 250,000 lots,” the expert added. “With so many recently established longs the risk of a correction was high going into the monthly supply and demand report. As a result both wheat and soybeans ran into profit taking after data proved less supportive than expected.”