Gold gets a helping hand from India

Oil prices ($98.99) again have advanced, capping the longest weekly streak in two years on speculation that US economic growth and the Euro’s efforts to contain the sovereign debt issues will boost demand for the black stuff. With event risk concerns being edged aside for fundamentals, demand seems “strong enough to tighten the balance” and push energy prices higher for the moment. Crude increased +5% last week, the sixth consecutive weekly increase.

Investors believe that Italy has dogged a bullet. Over this passed weekend, the Italian parliament (senate and lower house) has approved a debt-reduction package in a bid to cut the country’s debt of EUR1.9t. Accepted Berlusconi’s resignation after dominating Italian politics for 17-years, allowing the formation of a new technocratic government under Mario Monti. Coupled with Lucas Papademos, a former vice president of the ECB, been sworn in as prime minister of a Greek unity government should shore up investor confidence even further. Global bourses in the black and the dollar on the back foot has given the commodity the green light, for the time being at least.

Last week’s EIA report showed that crude inventories fell for a second consecutive week by -1.40m barrels to +338.1m, but remains in the upper limit of the average range for this time of year. Not to be left behind, gas stocks plummeted by -2.1m, one week after rallying +1.4m, and are in the middle limit of the average range. The market had expected both crude and gas inventories to rally by +1m and +1.5m respectively. Other data showed that oil refinery inputs averaged +14.3m barrels per day during the week, which were-358k below the previous week’s average as refineries operated at +82.6% of their operable capacity. US crude imports over the week averaged +8.6m barrels per day, down by-336k. Over the last four weeks, imports have averaged +8.7m barrels per day, which were +34k per day above the same four-week period last year.

For the commodity it has only been one way directional flow of late, do not be surprised to see investors take some of the recent premium off the table believing that the recent strength has come too far too quickly.

Gold ($1,788) is in demand globally. In India, Asia’s third largest economy, investors have been dumping bonds, switching asset classes and pouring record amounts into gold. Funds that invested in sovereign debt in the region shrank-4% in September and funds that invested in gold increased a record+8% during the same month. Investors have been seeking shelter from inflation that has held above+9% for the past eleven months. For the rest of us, the market has wanted to own some of the “shiny metal” as a safe haven investment away from market turmoil. Due to European sovereign debt issues, risk aversion trading strategies have tended to dominate of late. With all the developments in Italy and Greece over the past 48 hours, some of the event and weekend risk premium is expected to be priced out this morning.

Investors have been using the commodity as a safe-haven alternative to equities or FX. Individuals seem to want to insulate themselves from steeper price falls. The bullion is in its eleventh-year of a bull market and has rallied more than +11% since the end of September. Bullion traders and analysts are the most bullish in at least seven years as investors accumulate commodities at the fastest pace since August to protect their wealth from a widening European debt crisis.

Bigger picture, the commodity has also found support on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. With global sentiment in the fragile category, gold remains the go to “safer-haven” prospect. Retracements and corrections are possible even as the market ties to breach the psychological $1,800 barrier with conviction.

Other Links:
US Treasury’s under pressure as EU debt risk eases

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell