Strong gains were seen across global stock markets this week which further helped to improve investors’ attitude towards riskier assets such as commodities.

Strong gains were seen across global stock markets this week which further helped to improve investors’ attitude towards riskier assets such as commodities. The dollar fell against an index of currencies despite making good gains against the Japanese yen, while bond yields in Southern Europe fell as investors continue to chase yields in a world of diminishing returns and low volatility.

Both of the major indices as seen below recorded strong gains during the week ending November 21 (due to the US Thanksgiving holiday), especially the energy heavy S&P GSCI which notched up a two percent return due to strong gains across the energy complex, especially natural gas which continues to be bought as winter demand increases. Agriculture was the second best performing sector with strong gains seen in sugar and live cattle. Precious metals also notched up some gains led by palladium and silver while gold continue to consolidate within a confined range.

Commodity Update

Gold upstaged by palladium

While gold continue to consolidate in a relatively confined range between 1705 and 1740 USD/oz, other metals have done better, especially palladium. Although still the worst performer of the four metals during 2012 it has been doing a lot of catching up over the last month, especially following a report last week from Johnson Matthey, a leading specialist on Platinum Group Metals (PGM). This report forecast a deficit of palladium in 2012 due to diminishing supplies from Russia and South Africa as well as solid investment and auto catalyst demand. From being in a surplus in 2011, the reversal to deficit in 2012 is also expected to continue in 2013 leaving the price well supported on both a relative and an absolute basis. Palladium’s biggest problem is that the market is very small and many investors tend to shy away from it due to low liquidity and occasional high volatility.

Precious Metals

But getting ready to move on

Silver, meanwhile, has not been bound by the same technical shackles as gold and has moved higher and reached its highest level since October 15 despite a small pull back by ETF investor after the total holdings, according to Bloomberg, reached and breached the record of 18,350 metric tons. This was amount of silver invested in ETFs was last seen during the frantic rally to 50 USD/oz in April 2011. With silver often pointing the way we believe that the direction has been set and that gold will follow soon as the fundamental drivers behind precious metals have not gone away combined with the overall investment friendly environment often seen this time of year. The technical level on gold to look out for is 1740, a break of which should open up for a renewed attempt on the important 1800 level. Silver meanwhile will have to navigate through resistance at 33.60 before potentially moving back into the higher range seen during September and October.


Crude oil struggling despite Middle East concerns

Brent crude oil moved back above 110 USD/barrel earlier in the week following the escalating tensions between Israel and Gaza but once again technical resistance around 112 USD/barrel proved difficult to break as investors holding long positions were happy to reduce exposure having survived a few downside attempts at 105 during the previous couple of weeks. The failure to move higher despite tailwind from stronger equities and a weaker dollar could indicate that the global supply situation continues to improve and therefore does not warrant higher prices at this stage.

Strategic buying from China halted after completing phase one

A report in the Financial Times on Friday under the headline “China stops filling strategic oil reserve” is very interesting. The market and traders have been fully aware that parts of China’s continued strong demand for oil despite the economic slowdown were driven by the need to build strategic reserves in order to build a supply buffer against future supply disruptions. The IEA estimates that China diverted 106 million barrels into its SPR during the first seven months of the year which is equivalent to 500k barrels per day. In a world where the price of oil is determined by the marginal barrel of oil and by oil producers’ available spare capacity, such an extra draw helps to explain some of the price strength witnessed during the first quarter of 2012 especially. The second phase of China’s effort to build SPR is estimated to continue in early 2014 as some extra 200 million barrels of capacity will be ready to receive deliveries. A third phase will follow which in 2020 could bring Chinas SPR to 500 million barrels and become the world’s second largest reserve behind the US.

Price action on Brent Crude oil is currently confined to a USD 4+ trading channel as seen below and judging from the market behavior this week the support looks more likely to be tested than resistance, unless geopolitical tensions flare up once again.

Commodity Update

Soybeans stabilizing after the rout

The grain markets have witnessed very different fortunes during November with the biggest casualty being soybeans which at one stage dropped by 23 percent from the August highs following a recent USDA report which lifted the outlook for 2012/13 inventories as the harvest was not as badly hit as previously expected. As a result, soybeans have underperformed the other crops with the price ratio to corn sliding to levels last seen in early August and this could potentially now begin to provide some support. The CBOT soybean future for March delivery spent the week consolidating and this effort was further assisted by renewed worries about the state of the South American crop. Too much rain in parts of Argentina and too little in Brazil has the potential of causing an upset to production from this region when the harvest is carried out during the first half of 2013.

Paris wheat strong outperformer

The biggest winner in terms of price movement has undoubtedly been Paris milling wheat. While Chicago wheat has succumbed to selling pressure amid ample supplies stateside, the opposite can be said about Europe where reduced supplies from the Black Sea region have kept the price of Paris wheat elevated. Since August the price of Paris compared with CBOT has moved from an 80 cents/bushel discount to an 80 cents/bushel premium.