Crude and Gold sideswiped by Rabid Dollar

Crude oil took it on the chin from a couple of variables so far today. Prices have fallen on concerns about economic growth and demand for the commodity being curbed by debt problems in Europe and the US. Not helping the situation has been the strength of the greenback. A robust dollar will most likely pressurize “dollar-denominated crude prices”. That also includes most other commodities. Today, the dollar index has hit a six-week high on the assumption that the “super committee” failed to agree deficit-cutting measures. This has encouraged a dramatic shift from riskier currencies into the safety of the historical reserve currency, the “mighty dollar’.

Price movements are suffering a hangover after last weeks rapid movements on the back of glut issues in the WTI pipeline. Now that the market is questioning global growth, and the sustainability of any growth will have progressive price movements trading heavy. The market currently is trading net long as dictated by reluctant price appreciation.

Last week’s EIA report showed that crude inventories fell by -1.1m barrels to +337m, and remains in the upper limit of the average range for this time of year. On the other hand, gas stocks rallied by +1m barrels last week, after falling -2.1m in the prior week, and are in the middle of the average range. Oil refinery inputs averaged +14.7m barrels per day during the week, which were +344k barrels per day above the previous week’s average as refineries operated at +84.8% of their capacity. For the week, crude oil imports averaged +8.6m barrels per day, down by -53k from the previous week. Distillate supplies (heating oil and diesel), fell -2.14m to +133.7m. Stockpiles were forecast to drop -2.35m barrels.

For the commodity, it has been only one way directional flow for most of this month and it’s not be surprised to see investors take some of this premium off the table, believing that the recent strength has come “too far too quickly”.

Gold prices ($1,678) have backed off, dropping to a three week low as a stronger dollar curbed demand for the metal as an alternative investment. On the day, thus far, the shiny metal has lost -1.5%. Its recent decline has been very much a market “anomaly”. The commodity has moved lower in tandem with riskier assets, resisting its traditional trend of rising in uncertain times. The metal is in danger of falling further due to ‘sell-offs’ in other markets, as investors liquidate gold positions to cover losses elsewhere as funding dries up. Despite this, on dips there are some good buyers waiting in the wings.

In India, Asia’s third largest economy, investors have been dumping bonds, switching asset classes and pouring record amounts into gold. The market has been seeking shelter from inflation that has held above+9% for the past eleven months. For the rest of us, the market has wanted to own some of the “shiny metal” as a safe haven investment away from market turmoil.

Longer term investors have been using the commodity as a safe-haven alternative to equities or FX. Individuals seem to want to insulate themselves from steeper price falls. The bullion is in its eleventh-year of a bull market and has rallied more than +10.8% since the end of September. Despite the market being in the midst of a completely risk-off mentality, and with gold not been seen as a “flight-to-safety vehicle” analysts do not think that the long-term bullish outlook has changed.

Bigger picture, the commodity has also found support on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. With global sentiment in the fragile category, gold is expected to shine as the go to “safer-haven” prospect, once we are done with “raising funds”!

Other Links:
CAD falls, now playing catch-up
US Yields Plummet, Prices Balloon

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