Risk aversion has surfaced once again raising the question of whether it ever went away. Stocks and commodity markets are focusing on what is going on in the credit markets where bond yields within the Eurozone, bar a few, have risen and banks found it increasingly difficult to achieve funding. Most worryingly is that we have seen investors beginning to pull out of “safer” bonds from France, Austria, the Netherlands and Finland thereby raising the pressure on the European Central Bank to support markets in a more aggressive fashion than witnessed up until now.
Next week attention will turn to the US where the Congress deficit-reduction super committee will report back on how to reduce the US deficit by 1.2 trillion dollars over 10 years. Failure to reach an agreement will trigger automatic spending cuts across the government starting in 2013 and credit rating agencies might raise their rhetoric on the risk of another downgrade.
The European debt crisis for now though remains the only show in town and commodity investors worry about the potential for a global economic slowdown which would reduce demand for raw materials. The Reuters Jeffries CRB index was lower on the week as losses were seen across most commodities, particularly Silver and Palladium while WTI Crude Oil put in a relative strong performance.
Crude spread narrows on pipe reversal
The much followed but notoriously difficult to trade spread between US WTI crude and Brent crude saw the biggest collapse in weeks. Enbridge, the US operator of the Seaway pipeline, announced that it has agreed to reverse the direction of oil flows in order to enable it to transport oil from Cushing, the delivery hub for WTI, to refineries along the coast of the Mexican Gulf. Although this reverse flow, pending regulatory approval, will not commence until the second quarter of 2012 and not before 2013 in earnest it caught traders’ attention and the spread halved to eight dollars.
The spread has remained stubbornly high for months despite the storage levels at Cushing. The original explanation for the widening however has been shrinking in recent weeks thereby removing one of the reasons why US landlocked oil should be trading at a discount to the global market represented by the price of Brent.
The news about the pipe reversal triggered a strong rally in WTI which broke above 100 dollars per barrel only to succumb to profit taking once buy stops and spread closures had run their course. News from the outside markets where the financial system continues to freeze up and confidence is sapped triggered renewed selling but WTI nevertheless managed to hang onto the 100 dollar level.
While many doubt that the US economy, despite its continuous improvements, will be able to cope with triple-digit oil prices the scarce availability of products like Heating Oil and diesel from the US, to Europe and China should continue to keep the front end of the oil market well supported over the next couple of months. Brent crude on that basis will be looking for support towards 105 while a setback in WTI will be met with support at 97 and 95 dollars.
Gold struggling despite supporting news
Despite all the ongoing debt market worries Gold has failed to make any further progress towards and beyond 1,800 dollar per ounce. This is sending a bit of a worrying signal to the market as investments in exchange traded funds have risen strongly during November and are almost back to the record levels seen in August. A further pullback in the price, especially below 1,700, now carries the risk of a deeper correction.
Central banks record buyers in September
Supporting news also came from the World Gold Council which reported that central banks bought 148.4 tonnes of gold during Q3, the largest purchase in decades. The majority of the buying took place during September after prices had fallen sharply from the record high of 1,921. This also confirms market talk at the time about particularly strong physical demand emerging after the low of 1,535 was reached. This should give some comfort to investors as this trend looks set to continue in the months ahead with emerging market central banks especially wanting to diversify their growing foreign exchange reserves.
Dash for cash and Paulson
So who is selling? It seems like we have three overall themes that have caused the lack of support over the last week. The market was a bit unnerved by the news that John Paulson, the world’s most prominent gold investor, had reduced his holdings in the SPDR Gold Trust by one-third. He is the founder and President of Paulson & Co, a hedge fund which shot to fame in 2007 when he predicted and made billions on the subprime crisis. His flagship fund was down 40 percent in September after getting a number of bets spectacularly wrong. Whether he has moved into other gold investments such as physical bars in order to hide his hand or whether it was required in order to pay redemptions and cover losses elsewhere remains to be seen.
The dash for cash could be another likely explanation as many other investors continue to suffer losses and withdrawal of credit lines from banks. Finally you can also argue that if everyone already own gold as a safe haven hedge then the hedge itself becomes the risk and it carries the increased risk of a setback before the uptrend resumes. For now though we remain constructive towards further upside potential but cannot ignore the fact that a break below 1,680 carries the risk of triggering a deeper correction, potentially back towards critical support at the 200 day moving average, now at 1,592 dollars.
Silver knocked back after failing above 35 dollars
Silver has once again shown its role as the high beta gold with relatively small retracement in gold triggering an 8 percent collapse in Silver in just one trading session. Investors’ love affair with silver suffered another setback as a consequence with the inability to regain the 35 dollar level causing speculators to head for the exit once again. Near-term trading the range between 30 and 35 dollars seems to be the most obvious approach while we look for further direction from gold.
(The author is Senior Commodity Strategist at Saxo Bank)
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