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Commodities Weekly: Gold near 6-1/2 month high as dollar retreats

By Andrew Robinson Senior Market Analyst at MarketPulse

Welcome to the first Commodities Weekly of 2019.

Liquidity easing by the PBOC, a less-hawkish outlook on US rates and strong US jobs data have combined to boost risk appetite and help put a floor under most commodities.

Precious metals

GOLD is consolidating the strong up-move seen in December as the US dollar gave back some its 2018 gains amid a scaling back of Fed hike expectations for this year. The metal broke above the 200-day moving average in December and has traded above it for the past twelve sessions. Speculative investors added to their net long positions in the week to December 18, pushing them to their highest since the week ending July 10, according to CFTC data.

Gold’s retail demand may also pick up as we approach the Lunar New Year holiday festival in February. In seven out of the last 10 years, gold has risen versus the US dollar in the month where the New Year fell. A recent Bloomberg poll of gold market participants showed about 80% having a net bullish bias at that time.

The gold/silver (mint) ratio has retreated 5.8% from December’s peak and is approaching the 200-day moving average support at 81.32. The ratio has traded above this average since August 10 last year. The ratio’s decline came as SILVER outperformed gold, rising 14.2% versus the US dollar, since November 14, though it still fell 8.9% in 2018.

Gold/Silver Daily Chart

Source: OANDA fxTrade

PALLADIUM benefited from a global supply deficit in 2018, and that theme looks likely to extend through 2019, amid increasing demand from the automotive sector for use in catalytic converters, as emission controls are tightened in China and elsewhere. Palladium hit a record high since Oanda began collating data in 2005 yesterday, and has once again been trading at a premium above gold since Friday.

In contrast, PLATINUM has seen demand waning amid a rising supply surplus as the need from the automotive sector wanes. However, speculative accounts still are still maintaining a net long position, adding a net 396 contracts in the week to December 18, according to the latest data snapshot from CFTC.

Base metals

A shift in Fed expectations and a liquidity easing by the PBOC is helping COPPER rebound from 19-month lows struck at the start of the year, as fears of a rapid global deceleration abate, at least temporarily. Copper staged its biggest one-day gain since November 28 on Friday, and is currently consolidating those gains at 2.6213. The industrial metal fell 19.8% in 2018.

Copper could benefit from an inventory rebuild if the better global growth story continues, as copper stocks held in LME-registered warehouses are reportedly at decade lows, according to Reuters. Eyes are also on the ongoing trade negotiations from January 7-8 between the US and China. The US has expressed optimism that a deal that both sides could “live with” could be struck.

Energy

CRUDE OIL prices have been rising since the start of the year, and could be poised for the second weekly advance in a row, following reports that OPEC trimmed production by 0.5 million barrels per day in December, as promised earlier that month. The advance was also helped by the US jobs report last Friday, which suggested that the sky was not about to fall in on the US economy and that demand could be rekindled.

The spread between Brent and WTI is about 8.5 dollars and has traded in a 7-10 dollar range for the past three months. Weekly inventories data as at January 4 from the American Petroleum Institute are due later today. Last week saw a drawdown of 4.5 million barrels, the first in three weeks.

Brent/WTI Spread Chart

Source: OANDA fxTrade

NATURAL GAS is struggling to gain upward momentum, despite persistent demand outstripping supply. The latest EIA storage data showed a draw-down of 20 billion cubic feet in the week to December 28, which was reported last Friday. This made it the seventh week in a row of falling stockpiles. Nevertheless, gas prices are stuck near 3-1/2 month lows at 2.992. Forecasts of colder-than-normal weather in the US could prompt gains, or at least prevent further slippage.

Agriculturals

The partial shutdown of the US government has meant that a number of regular reports from the US Department of Agriculture (DOA) will be delayed, notably the World Agricultural Supply and Demand Estimates (WASDE) and the weekly crop reports.

In percentage terms, WHEAT was the best performer of all agricultural commodities tracked by Oanda last year, rising 19.2% on the year. The commodity touched a near-two week high yesterday. One DOA report that was released forecast that US wheat exports for the 2018-19 marketing year would be cut by 25 million bushels to 1 billion bushels, with the US facing strong competition from Russia, the report added.

Concerns about SOYBEAN yields and output from Brazil are supporting prices, as the country’s main crop-producing areas were hit with scarce rains in December. Soybean prices closed above the 200-day moving average yesterday for the first time since June 5, and are currently at 9.075, sitting just below the 3-1/2 week highs of 9.117 hit yesterday.

Soybeans Daily Chart

Source: OANDA fxTrade

Forecast output reductions from Thailand, India and Brazil in the 2018-19 season which runs from October to September, are helping to lift SUGAR prices from three-month lows. Sugar posted its biggest one-day gain since June 2017 yesterday, climbing to a three-week high of 0.12318, after the 100-day moving average moved above the 200-day moving average last Friday, the first time since April last year.

CORN prices touched the highest level since June 13 yesterday, and look poised to advance for the fifth consecutive day today. The commodity is sitting just below the 61.8% Fibonacci retracement level of the May-July drop last year. Hopes for a resolution to the US-China trade war could be driving demand, while US data could suggest that the global economy is not about to go into free-fall.

Corn Daily Chart

Source: OANDA fxTrade

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