Commodities corner: All flight, no quality

Gold prices fell to their lowest levels in more than two years on Friday, as expectations of a significant US interest rate rise next week, along with a rising US dollar, again hit prices and confidence in the metal.

After failing to hold the $US1,700 an ounce level earlier in the week, gold retreated even further, touching the lows last seen in April 2020.

The dollar gained against the yen, sterling, the euro and the Australian dollar.

And the yield on US 2-year bonds fell 0.4 basis points to 3.87%. The 10-year rate fell less than 1 basis point to 3.45% to be up 18 points over the week.

With bond yields expected to go higher, some investors have sold out of gold and moved into other assets, particularly dollar-denominated ones as they seek safety ahead of next week’s expected rate rise from the US Federal Reserve.

On Friday spot gold briefly fell to $US1,654 an ounce, which is 19% below its recent peak in March, and 8% lower than its price at the beginning of this year.

Comex December gold edged up to end around $US1,684 an ounce, up around 0.4% on the day but down more than 2% for the week.

“Until recently, gold has managed to fend off the news,” said Ole Hansen, head of commodity strategy at Saxo Bank. “But just recently it has broken lower; there is a lot of technical trading in that.”

Negative economic news, including the strong US Consumer Price Index last Tuesday, helped undermine commodities like gold (and oil).

The unexpectedly strong US CPI numbers, combined with slowing jobs growth, and rate rise forecasts have undermined the gold market.

“People are paring back and rebalancing . . . looking at bonds, and dollar-denominated assets,” said Joseph Cavatoni, chief market strategist for the World Gold Council.

“Everything has had a wild week in terms of price performance,” he added. “You are seeing a lot of volatility, and the same with gold,” he was quoted in the Financial Times at the weekend.

The ultra-strong dollar has put pressure on gold and other commodities by making them more expensive in other currencies.

Gold is traditionally viewed as a hedge against long-term inflation but that does not always hold true in the short term, and has not been the case this year.

“What it looks like at the moment, is that the gold price is tracking real yield on US government bonds,” said Alex Bedwany, mining analyst at Canaccord Genuity. “The indicators at the moment are not looking all that positive for gold.”

Comex silver futures rose 1.8% on Friday to $US19.615 despite the strength in the value of the greenback. Comex silver actually rose 4.4% for the week.

Comex copper rose on the day as well – up nearly 1.5% to nearly $3.50 a pound. That was still down 0.3% for the week.

Iron ore prices fell by around 4% over the week on the SGX futures market in Singapore. The price for 62% Fe fines ended at $US98.10, down from $US102.98 the previous Friday.

And Newcastle thermal coal prices fell 2.6% on Friday to a still very high $US416.90 a tonne for the December contract. That was still up 1.25% over the week.


Meanwhile benchmark West Texas Intermediate crude oil for October delivery rose 1 cent to $US85.11 a barrel on Friday and Brent crude for November delivery rose 51 cents to $US91.35 a barrel.

US crude lost 0.8% for the week and Brent, 0.9%.

The rise in the US dollar hit oil (like gold) and prices fell for a third week in a row.

The number of oil rigs operating in the US rose eight last week, reversing a recent weakness.

Data from Baker Hughes showed the count increased to 599 oil rigs in the week to Friday, up from 411 a week ago.

Oil and gas rigs in the US rose by four to 763. Gas rigs dropped by four to 162, while miscellaneous rigs remained unchanged at two.

In the same week 2021, there were 100 gas rigs and one miscellaneous rig in operation. Overall, there were 512 rigs operating a year ago.

Worrying the oil market is the expectation demand from China will not be as strong as though earlier in the year.

The International Energy Agency now estimates that Chinese oil demand is expected to fall by 420,000 barrels a day this year.

The fall was blamed on the cumulative impact of the continuing restrictions on movement to fight Covid and weak demand from industry.

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