Gold finally break its shackles

Commodities continue to benefit from geo-politics and tight supplies. This is particularly supporting energy prices while adverse weather is keeping key crops at elevated levels. During the week the much followed and energy heavy S&P GSCI index recovered more than 20 percent from recent lows and it triggered news about a new bull market for commodities. A spanner in the works for this outlook however comes from iron ore, a key component in steel production, which fell below $100 for the first time since 2009 on reduced demand, especially in China where stockpiles are rising, according to a weekly commodities report from Saxo Bank prepared by Ole Hansen - head of Commodity Strategy. In China stocks fell to a three-year low as manufacturing activity continues to contract while in the US minutes from the latest Federal Open Market Committee meeting called for additional monetary stimulus should key economic data continue to disappoint. These two events triggered a rise in expectations for additional stimulus being provided by both China and the US in the near future. The dollar was sold and commodities in general and especially precious metals continued to rally. In precious metals the rally was started by platinum during the previous week. With the US Federal Reserve clearly on economic data watch at the moment it is important to point out that some data following the last FOMC meeting has improved, thereby leaving Chairman Ben Bernanke in a difficult situation at the annual Jackson Hole symposium at the end of August as many investors have raised expectations for additional stimulus to be announced. But with the US election approaching, retail gasoline prices moving towards four dollars per gallon and stock markets near multi-year highs we think the Federal Reserve could end up disappointing those who make their investment decisions purely on the back of expectations for additional stimulus. Precious metals continued to build on the gains which initially got under way when platinum raced higher following the massacre at the Marikana platinum mine in South Africa. Silver was the star performer, once again showing off its high beta credentials, as it outran gold by a considerable margin. The broadly based DJ-UBS CI put in its strongest performance in five weeks, rallying by more than two percent as gains were seen in all three major sectors, the Saxo Bank report said. Oil The rally that began in late June and which has now seen the price of Brent crude recover 70 percent from those lows has begun to run out of steam as questions have been raised as to whether the market is now too far ahead of itself, given the current economic climate. High oil prices once again carry the risk of impacting economic activity in a repeat of the Q2 performance seen during the last two years where high Q1 prices triggered a slowdown in the following quarter. With China showing increased signs of a slowdown, growth is becoming more elusive with only the US economy indicating some improvements. The rally in Brent crude has now paused ahead of $116.60. This level has proven to offer both resistance and support several times during the last year. Some position adjustments could now be expected after such a strong run up and also ahead of Chairman Bernanke’s speech next Friday at Jackson Hole, which could potentially disappoint and thereby trigger additional selling. Gold Following more than three months of range bound trading activity precious metals, especially gold, needed a trigger to challenge resistance and generally apathy among hedge funds and other large speculative investors. Such a trigger was provided by the mining strike and subsequent massacre of workers at the Marikana platinum mine in South Africa and the subsequent potential for labor disputes to spread as a spike in the price of platinum helped drag both gold and silver above previous resistance. Platinum was initially the strongest performer, not least due to investors being forced to cut sold positions in the futures market as the gross short position ahead of the rally last week stood at a record 1.86 million ounces. Once the rally spread to gold and silver it gathered momentum and resulted in a quick sprint higher. Heightened expectations about additional quantitative easing from the US or at least an extension of the current policy of low rates until 2014 helped carry metals higher as it also resulted in inflation worries. This saw expected real yields in the US sink deeper into negative territory thereby further removing one of the obstacles for more price appreciation in non-coupons on interest paying assets like precious metals, the Saxo Bank report said. From : Arabnews