With global stock markets heading for the best monthly performance since last July, gold has found it increasingly difficult to hold onto recent gains.
The MSCI World index which monitors stocks from around the world rose more than eight percent during July as better economic and corporate data helped sentiment. Consumer confidence readings are still on the low side which continues to indicate a bumpy recovery ahead. Robert Schiller, a well known professor at Yale University, sees the risk of a US double dip recession as being above 50 percent.
The positive sentiment from stocks, where more than 77 percent of companies in the S&P 500 Index reported earnings above expectations, helped drive the yield on corporate bonds to a six year low. This according to Bloomberg triggered a record USD 85.7 billion issuance of debt in July with investors snapping up the relative high yield compared to governments bonds.
The Reuters Jefferies CRB index rose 1 percent on the week and returned 4 percent in July, the best monthly performance since May 2009. Gains were recorded across different sectors. The best performing markets were sugar, coffee, wheat, natural gas and palladium with losses in other energies and gold pulling in the opposite direction.
The price of gold dropped below the May low and has come close to the important 200 day moving average support at 1,150. This is the level that many long term investors view as the level that needs to hold. The speculative long position on Comex has been reduced by 27 percent over the past three weeks and another reduction is expected this week. Meanwhile Gold held in Exchange Traded Funds also saw a reduction albeit only by one million ounces, a mere 1.5 percent of total known holdings.
The next couple of weeks will be very important as to the near term direction of gold. The worry is that a move below 1,150 could trigger a much larger correction than the 100 dollars seen so far. Supportive news this week was a pick-up in physical demand with jewelers taking advantage of the recent drop in the price of both gold and the dollar. The strength of the global recovery is still debatable as the Yen, often viewed as a safe haven, strengthen against the dollar and the euro.
Technically 1,150 on spot gold should provide strong support followed by 1,124 while resistance levels are 1,176 and 1,185.
During this recent sell off silver has managed to outperform gold which is unusual during a correction phase as silver tends to get hurt more due to lower liquidity. Meanwhile platinum is still finding support both outright and on a relative basis to gold with the ratio indicating further support near term.
Investors’ love affair with Palladium continues having rallied ten percent during July and despite the violent sell off in May shows a year to date return of 19 percent. Spot palladium has now recovered more than 50 percent of the May sell off trading at 490 dollars per oz. and as such should find resistance towards 505 where either profit taking or a switch into platinum could be viewed as reasonable suggestion.
Crude oil continues to trade sideways having failed to find any traction recently. A weaker dollar and higher equity market has been offset by worries that that the global recovery will not be strong enough to boost demand. The weekly US crude inventory data showed another surprise increase, this time by 7.3 million barrels versus an expected drop of 1.7 million.
One of the reasons behind this surge in inventory was triggered by record imports into the Gulf of Mexico region as crude came onshore from floating storage. Profits from storing crude oil for future delivery has almost disappeared as forward prices have dropped. Last year up towards 100 million barrels was kept on floating storage but this has now dropped to around 10 million. Since April the spread or Contango between the two nearest futures contracts has dropped from 4.58 dollars down to 45 cents today removing the profitability of this strategy.
Technically WTI crude oil for September delivery is stuck in a wide 72.60 to 81.00 range with the latter being 50% retracement of the May sell off. Inside this range further resistance can be found at 79.70 and support at 75.90.
Talk of another global food crisis has begun to emerge on the back of the heat wave that has hit Russia, Kazakhstan and Ukraine this past month. Temperatures have reached highs that have not been seen since record began 130 years ago and so far the damaged crop area covers some 103,000 square kilometer or 25.5 million acres. In Chicago wheat futures have had the biggest monthly gain since 1973 while European milling wheat have rocketed by 40 percent this month reaching a high of 194.50 Euro per metric tons.
Analysts fear prices could rise further in the coming weeks as the region continues to cut its estimated wheat crop production. Being the third largest exporter globally any news of a reduced crop will increase prices from other regions as fewer countries will compete for export tenders. The International Grains council has revised global stockpiles down by 2.5 percent to 192 million metric tons by June 2011 reversing a forecast for higher inventories just last month.
While this uncertainty persists technical levels have little use as momentum and fear more than anything drives prices. September wheat on CBOT trades close to the November 2009 high at 639.75 but whether that will provide any resistance remains to be seen. Weather forecast from Europe, Russia and even Canada, where they are struggling with too much rain, will be watched closely as any signs of change should remove some of the recent support.
The price of the high quality Arabica coffee future rose more than six percent on the week, reaching a 12 year high at 178.75 dollars per pound due to a tight supply situation stemming from a step drop in Columbian production. Tightness in the spot market could persist until an expected record Brazilian crop hits the market in a few months time.
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