Monday Kitcommentary – Drunk on Crude-Aid

by Jon Nadler, Kitco Metals Inc. on April 4, 2011 · 0 comments

Friday’s positive US jobs report and the on-going turmoil in the MENA region conspired to push crude oil values to fresh, 30-month highs early this morning, which, in turn, reignited intense speculative activity in the precious and base metals sector as the new trading week got underway.

Bullion BarsA string of news stories relating to aggravating or emergent violence and tensions anywhere from Libya to Yemen, from Syria to Nigeria, and to the Ivory Coast sent investors piling into black gold and helped them push the WTI benchmark to above the $108.75 per barrel price level (and to the $119.40 mark for Europe’s benchmark Brent crude). A rescheduling of Nigerian elections has placed speculators on edge today, as they watch Africa’s largest oil producer grapple with political uncertainty.

Perceptions that Japan, which remains the world’s third largest economy, might also use higher amounts of oil as it begins to recover from last month’s natural disaster helped oil prices gain additional speculative traction as well this morning. Notwithstanding the frenzy in the oil pits, market analysts are of the opinion that values might soon retreat to levels some $10 lower than what is manifest this morning. Kuwait Petroleum’s CEO said today that crude’s current price is "worrying" and too elevated, and that his country would rather see the commodity trading in the $90 to $100 range.

Such level-headed and fundamentals-based talk was evidently lost on oil speculators as they…pumped up their net-long bets according to CFTC data that came in late last week. The gambling crowd hiked the current net-length structure of the oil market to just below its all-time high that was on display circa three weeks ago. The net length being held by so-called non-commercial traders in the commodity amounted to 9.31% of the total open interest in oil, and that represents a fresh record high.

At this juncture, the situation in the oil trading pits might only witness a reversal of fortune if and when any number of the currently-in-turmoil countries mentioned above return to normalized conditions. Chief on that list would be Libya and the departure of The Colonel. Oil speculators are on alert for any potential development of such a nature, amid reports that Mr. G’s sons are offering the possibility of his abdication.

There are also other reports that a Libyan envoy is currently in Europe, also offering certain conciliatory signals from the embattled Libyan strongman. Any such positive resolutions to the situation could bring about a swift "adjustment" in the price of oil and also help erase some of the inflationary apprehensions that its price tag has recently brought about. Most central bankers have tendered the opinion that the current spike in commodity prices is but a transitory phenomenon and should not be interpreted as damaging to the global economy. The type of inflationary expectations that commodity traders are signaling at this moment however, are clearly not ones that would concur with those assessments.

The speculative situation was largely similar in gold and silver at the start of today’s trading action. Despite the better-than-anticipated US jobs market report from the Commerce Department — an additional development that might send the Fed towards the "EXIT" door sooner rather than later in the current year, the CFTC data continues to reveal that the bets in the yellow and the white metal are positioning themselves towards the probability of higher price ground being reached. Such price territory was indeed trekked upon, this very morning, in silver; it reached a fresh, 31-year pinnacle at $38.57 on the back of heavy buying by funds.

Spot gold trading opened with a $9.90 per ounce gain in New York on Monday, as the hefty additions to crude oil values helped the entire commodities complex reach for higher ground. Support in bullion is currently seen as residing near the $1,419 and $1,404 price-points, while resistance overhead remains in place near $1,444 and the $1,452 levels. Crude oil will provide much of this week’s lead for the gold trade (and a crowded trade it is, but perhaps nowhere near as sardine can-like as is silver).

The broader trading range remains unaltered, and extends from $1,400 to $1,450 per ounce. The US dollar saw only marginal declines as speculators appeared to have already factored in the potential outcome of the Thursday meeting of the ECB; i.e. that central bank’s first interest rate hike since the wild days of 2008. "Buy the rumor — sell the fact" may not yet have materialized in the euro and much still depends on the Fed’s posturing following what is widely anticipated as being a fait-accompli as regards the ECB’s hike.

Platinum and palladium appeared to totally shrug off the Japanese automobile supply disruption and roared ahead on the back of equally lavish speculative attention being paid to them as was being manifested in black and yellow gold this morning. The former gained $24 to start the day’s New York session at $1,787.00 per ounce, while the latter rose $12 to open at $785.00 the ounce. No change was reported in rhodium — its bid-side quote remained static at $2,330.00 per troy ounce. We offered the most recent analysis of the noble metals’ group markets in last week’s closing commentary, courtesy of Standard Bank (SA).

The TIPS market shows that inflationary expectations have indeed risen from their recent (August) low of 1.5%. The yields currently manifest in the ten-year instrument of that type are reflecting an average expected inflation rate of 2.53% for its duration. Meanwhile, the smoke signals coming from the Fed are not containing any images of a possible QE2.5 or QE3. Moreover, there is still distinct possibility that the current QE2 program might come in some $100 billion short of its original $600 billion initial scope. Recent data from the US Labor Department has tallied a decline in US joblessness from the 10.1% peak of 2009 to the current 8.8% (recorded last week).

The investment crowd in the Treasury market is evidently being swayed by the recent string of hawkish Fed Presidents’ comments on the prospects for US interest rates. Following nine consecutive days of losses, the US Treasurys market appeared to convincingly reflect the feeling among US government bondholders that QE is all but finished and that the Fed will indeed make for the "EXIT" door, as it has to. The only lingering questions regarding such a policy shift are related as to whether it will be gradual or swift in nature and in execution. Many in the commodities’ niche are watching with bated breath.
As everyone who reads these columns obviously knows by now, the record low level of interest rates that the Fed created in the wake of the opening of its liquidity spigots has drawn massive amounts of investment dollars into commodities, into and risk assets in general. An unwinding in the Fed’s monetary policy of the past circa two years could bring about a similar event in hitherto (literally) "over-inflated" assets.

Societe Generale’s Asia equity strategist, Todd Martin, said today that "once the Fed ends or reverses its policy bias, then the inflation trade — where investors actively invest in commodities and underlying stocks amid expectations that high global liquidity levels will boost demand and prices — faces the risk of potential unwinding."

Fed communications are now slated to come our way more frequently and more detail-laden than ever before. The US central bank has signed up for press conferences (the first one will be held late this month) via which it will release inflation, unemployment, and GDP projections without the customary three week delay we have been used to. This type of approach and transparency stands in stark contrast to those who have viewed the Fed as utterly "opaque." In part, that kind of perception may have been the result of the Fed’s own "strategy." Certain of its members believed that announcements of policy that took markets by surprise were the most effective ones, as opposed to a priori signals that result in the markets "seeing" the Fed coming with policy x or y and moving ahead of it.

Until tomorrow, keeping one step ahead,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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