Precious metals, grains hit by profit-taking
Trump policies starting to be set in motion
Gold traders book profits ahead of Chinese New Year
The Bloomberg commodity index traded lower for a second consecutive week, thereby almost returning to unchanged on the month. Crude oil remained rangebound, soft commodities rose while profit-taking hit precious metals and grains.
This was the first full week of Donald Trump’s presidency and already we are seeing his ‘American First’ mantra being played out through his policy initiatives. The jury is still out on whether trade barriers and import taxes will lead to a stronger dollar. Protectionism could trigger a contraction in global trade and with that we could see less, not more, demand for US dollars.
When Trump says the Chinese yuan is too weak, he indirectly implies that the dollar is too strong.
Gold traded lower for the first time in six weeks as traders booked profit ahead of the Chinese New Year period, which tends to signal slowing demand. In addition raised risk appetite helped send stock markets higher, particularly the Dow Jones Industrial index which finally broke the psychological level of 20,000.
Bond market yields, a key driver for gold since the November US election, rose by a few basis points while the dollar tried to recover some of its recent losses.
Crude oil remains rangebound with positive production cut news from Opec and Russia being offset by rising production elsewhere. Brent crude oil has been averaging $55.5/barrel since early December and during this time the market has never swayed far from this level.
Opec and non-Opec producers that are currently in the process of cutting production have been very upbeat about the prospect of hitting a very high level of compliance. We have to wait until February 13, when Opec publishes its ‘Monthly Oil Report‘ for January, before we get a clearer picture about the cutting process.
For now, however, the price remains supported but the at the same time we see limited upside potentials for several reasons. In the week to January 17, hedge funds held a gross long in Brent crude and WTI crude oil futures close to a record one billion barrels. A one-sided bet of this magnitude, which is likely to have risen further this past week, should cause some concerns with traders holding these positions looking to take profit if price weakness emerges.
Meanwhile in the US production, rig counts and inventories of both crude oil and gasoline are all pointing higher while Libyan production continues to recover.
On this basis we maintain the view that opposing forces are likely to keep oil rangebound for now but with an increased risk that we may see $50/b or lower before $60/b.
The nearly non-stop gold rally that kicked off following December’s Federal Open Market Committee rate hike hit the buffer this past week. Surging stocks and the impact of changing US policies with regards to trade, tax, and fiscal spending, combined with the beginning of the Chinese New Year celebration, helped trigger profit-taking.
Movements in the dollar and bond yields (which both have been major drivers for gold, first down and later up, since the US presidential election) helped trigger some profit-taking this past week. While the dollar regained some ground against the Japanese yen, US 10-year real yields rose by a few basis points.
Chinese demand for gold was reported as being strong in the run-up to the Lunar New Year celebrations. With the Chinese markets being closed until February 2, demand is likely to be impacted during this time. Total holdings in exchange-traded products backed by gold returned to the early January low after seeing a reduction of 8.5 tonnes this past week.
While a correction was overdue, some nervous trading is likely to resurface after seeing gold surrender the gains above $1,200/oz. From a technical perspective, support needs to be established between $1,172 and $1,160/oz in order to avoid a return to the December low.
We maintain the view that many of the new initiatives currently being announced by the US administration may sway the pendulum back in favor of gold. Adding to this, we have the potential of Trump sending out more signals about preferring a weaker dollar.
The Federal Open Market Committee meets on February 1. This the first meeting following the December 13 rate hike will be a challenging one. The FOMC is in tightening mode but hiking rates again so shortly after the changeover in Washington may trigger some unwanted attention from the White House.