Precious metals climb, oil stays range-bound

Slight gains in oil prices

A weaker US dollar, and strong OPEC+ compliance, saw both Brent and WTI carve out modest gains overnight. Brent crude rose 0.70% to USD45.30 a barrel, and WTI rose by 1.25% to USD42.75 a barrel. In Asia, some profit-taking has been evident, ahead of the OPEC+ monitoring meeting, both contracts easing slightly by 0.10%.

Despite the decent gains overnight though, both Brent and WTI remain in range-trading mode. Plentiful global supply and Covid-19 derived consumption fears continue to plague oil markets, limiting their upside.

That is highlighted by the contango in the Brent crude futures curve, with Brent crude for immediate delivery at a lower price than the futures forward dates. That implies that immediate supplies globally remain plentiful, which is one of the significant reasons that both contracts remain stuck in range-trading mode. The contango will need to reduce substantially, or ideally, move into a modest backwardation, for prices to move materially higher.

The FOMO-trade is back for precious metals

Gold and silver rallied powerfully overnight as the hot money finished licking its wounds and piled back en masse into long precious metal positioning. Gold rose 2.10% to USD1985.00 an ounce, and silver rose 4.0% to 27.4850 an ounce. The rally has continued in Asia as US dollar weakness persists in the region today. Gold has climbed to USD1991.50 an ounce, and silver has risen to USD27.7800 an ounce.

As I stated earlier, it’s all about the yield and the move lower by the US 10-year was all the greenlight that markets needed to reinstate long precious metal positioning. The ensuing weaker dollar also gave a tailwind to both trades. But the real story here is negative real US dollar yields, which have moved more negative again after nominal ones fell overnight. That is the underlying driver for gold and silver’s outperformance, and we appear to be back to business as usual.

The debasement of the US dollar as a tsunami of US government debt, combined with Federal Reserve quantitative easing from here to eternity, are the culprits. Both themes will serve gold and silver well throughout 2020 and 2021. Such moves will not be linear, as evidenced by the emotional corrections lower seen last week, but the underlying theme remains undiminished.

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