Gold has come off recent highs on reduced safe haven buying and US dollar recovery however we do not expect a sustained decline as Fed’s dovish stance may limit upside in US currency.
COMEX gold trades lower near USD 1935/oz after a sharp 1.7 percent decline yesterday. Gold rallied sharply earlier this week but failed to sustain above the USD 2000/oz level, led by some correction. The mixed trade in gold has been on the back of mixed movement in the US dollar.
The US dollar index slumped to fresh 2-year low earlier this week as market players assessed Fed’s inflation strategy, however, we have seen a positive close for last two sessions amid efforts to revive US stimulus talks, mixed European economic data and uncertainty relating to Japan’s economic policies under new leadership. The US dollar managed to end higher despite mixed economic data, lower bond yields and dovish stance of Fed officials.
US ADP jobs report noted a much smaller than expected rise in private-sector jobs while factory orders data showed further improvement in the manufacturing sector.
Gold’s directionless trade shows lack of confidence in the market and same is evident from ETF flows as well. Gold holdings with SPDR ETF fell by 0.58 ton to 1250.042 tonnes yesterday, second consecutive decline. The steep discount in the Indian and Chinese market indicates weaker consumer demand despite price correction.
Gold also weakened as equities gained momentum reducing yellow metal's appeal as an alternative asset. US equity markets hit fresh highs amid expectations of continuing stimulus measures and progress on vaccine front. However, supporting gold price is the rise in virus cases globally and increasing tensions between the US and China.
Gold has come off recent highs on reduced safe-haven buying and US dollar recovery, however, we do not expect a sustained decline as Fed’s dovish stance may limit upside in US currency.
NYMEX crude trades marginally lower near USD 41.3/bbl after a 2.9 percent decline yesterday. Crude fell yesterday as part of sell-off across commodities on back of gains in US dollar. The US dollar index slumped to 2-year low earlier this week but has attempted a recovery amid efforts to restart US fiscal stimulus talks, mixed European economic data and uncertainty relating to Japan’s economic policies under new leadership.
Crude weakened also on mixed US economic data and inventory report. US ADP jobs report noted a much smaller than expected increase in US private-sector jobs, however, jobs growth for a month earlier was revised higher. Meanwhile, factory orders data showed further improvement in industrial activity. US EIA inventory report was largely positive but was played down because it was partly due to the disruption caused by storm activity last week and was temporary in nature.
EIA noted a 9.362 million barrels decline in US crude oil stocks as against expectations of a 1.9 million bbl decline. Crude stocks fell amid a sharp drop in production and imports which offset the decline in exports and refinery rates. US crude production fell from 10.8 million barrels per day to 9.7 million barrels per day, partly due to shutdowns in the Gulf of Mexico because of storm activity. Most of the production has been resumed and next week we may see a higher reading.
As per US BSEE, about 19.9 percent of crude production in the Gulf of Mexico was still shut as of September 2 as against 28.38 percent a day earlier. EIA also noted a bigger than expected decline in gasoline and distillate stocks but demand fell.
Crude weakened also on signs of rising OPEC supply. As per a Reuters survey, OPEC production rose by 950,000 barrels per day to 24.27 million bpd in the month of August. Also weighing on crude price is persisting worries about US-China tensions. Amid the latest, the US on Wednesday imposed fresh restrictions on Chinese diplomats in the US (Reuters).
However, supporting crude price is persisting strength in the US and global equity markets amid hopes of continuing stimulus measures and progress in vaccine development.
Crude came under pressure after struggling to break past the key USD 44/bbl level however it still continues to trade within the broad range seen for last few weeks.
We expect choppy trade because of mixed factors but buying could be considered at lower levels as prices may benefit from decline in US crude stocks and general strength in the US equity market.
The author is VP- Head Commodity Research at Kotak Securities
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