Last week began with further weakness of Japanese yen as G-20 statement largely shrugged off concerns over competitive currency depreciation in major economies. Release of the FOMC minutes caught most attention towards the end of the week. The minutes for the January FOMC meeting indicated that policymakers were more upbeat on the US economic outlook as driven by improved business confidence and household consumption. They acknowledged better employment conditions but stressed that 'the recovery in the labor market was far from complete'. The debate on additional QE remained rigorous but balanced. The focus was on the benefits and costs of additional asset purchases. While some suggested asset purchases to end 'well before the end of 2013', others warned of the 'significant' costs of ending purchases prematurely. Rigorous discussions about continuation of QE have triggered speculations of an early exit which sent the US dollar higher but risky assets including commodities and stocks lower.
Precious Metals: The complex declined last week with gold and silver losing -2.26% and -4.63% respectively. For PGMs, platinum and palladium plunged -4.19% and -2.16% respectively. The hot topic for precious metals is whether gold’s long-term uptrend has ended. The yellow metal made a record high above US$ 1900/oz in September 2011. Since then, price has been range-bounded with 1500 being the lower boundary. After failing to re-test the record high in October, gold price has since then declined -12%. A close look as the correlation between gold, US real interest rates and the USD should give us some insight on the issue.
Traditionally, US real interest rates are negative correlated with gold price, i.e. it is positive for gold as real rates are low and/or negative, as lowest interest rates reduce the opportunity cost of owning the precious metal. The following chart shows that the Fed’s QE programs have driven real rates lower in the past few years. However, recent FOMC meetings signaling that the central bank might terminate QE sooner than previously anticipated have lifted real rates. This has in turn put pressure on the yellow metal. While unstable, gold is conventionally believed to be trading in opposite direction as the greenback. The strength of the USD index in recent weeks has given additional pressure to gold.
It appears that these two indicators have been negative for gold’s outlook. Yet, investment demand has remained firm. Despite outflows, the size has remained modest. Data from SPDR Gold Trust suggested that ETF gold holdings have declined only -4% since October 2012 when gold price has dropped more than -10%. Indeed, although it is likely that downside risks to gold remains, whether there is a structural change in the price trend depends on further weakness in economic data from the US and China.
Natural Gas: The DOE/EIA reported that natural gas inventory fell -127 bcf to 2400 bcf in the week ended February 15. Stocks were -242 bcf less than the same period last year and -361 bcf above the 5-year average of 2 039 bcf. Separately, Baker Hughes reported that the number of gas rigs added +7 units to 428 in the week ended February 21. Oil rigs decreased -8 units to 1 329 and miscellaneous rigs remained unchanged and the total number of rigs fell -1 unit to 1 761. Directionally oriented combined oil, gas, and miscellaneous rigs added +3 units to 197 units while horizontal rigs added +1 unit to 1 140 units and vertical rigs slid -5 units to 424 during the week.
Crude Oil: Crude oil prices showed a reverse of the rallies over the past weeks with ease in geopolitical tensions and Saudi Arabia’s potential increase in output being the key factors. After cutting production in 4q12, the world’s largest oil producer is expected to rise exports in 2Q13 so as to meet demand in countries such as China. The front-month contract for WTI crude dropped -2.85% while the Brent crude contract fell -3.035. The WTI-Brent spread was narrowed modestly.
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