Author: Consultant

Gold Sleeps And Drifts Lower- The Catalysts That Could Ignite The Precious Metal

Gold futures on the CME’s COMEX division reached a record high of $2,072 per ounce in March 2022, slightly eclipsing the August 2021 $2,063 previous all-time peak. The ascent of gold futures began in 1999 when the price found a bottom at $252.50 per ounce during the UK’s sale of half the country’s reserves. While the UK sold a significant percentage of its holdings, other countries did not follow. Over the past twenty-two years, countries, central banks, and monetary authorities worldwide have been net buyers of the metal, validating its role in the global financial system. 

At the $1,745 level on the active month December COMEX futures on August 30, gold has corrected 15.8% from the March 2022 high. However, the price remains seven times higher than the 1999 low, and the prospects are for even higher highs over the coming months and years. 

A correction takes gold lower, but the long-term pattern remains bullish

While the gold price dropped by nearly 16% over the past five months, the long-term trend remains bullish. 

As the chart highlights, the pattern of higher lows and higher highs since 1999 remains intact as gold traded to a low of $1679.80 in July 2022, higher than the $1673.70 low from March 2021. Gold stopped falling at the correct technical level after the March 2022 high, but higher interest rates and a strong US dollar continue to weigh on the price in late August.  

Russia’s declaration could start a trend in the gold market

Facing the US and European sanctions after Russia invaded Ukraine, Moscow decided to back 5,000 roubles with one gram of gold. Backing the Russian currency with gold caused it to rise against the US dollar. Meanwhile, the dollar’s value has increased against the euro and other reserve currencies over the past months. 

The chart illustrates the upward trajectory of the dollar index, which measures the US foreign exchange instrument against the euro, pound, yen, Canadian dollar, Swedish krona, and Swiss franc. 

The Russian rouble has strengthened against the US dollar since the March 2022 low. The rouble is trading at the highest level against the US dollar since early 2018 and reached a seven-year peak in June 2022. The strong rouble is a sign that the implied backing with gold has strengthened the Russian currency. 

The geopolitical arena supports higher gold

The February “no limits” agreement between Russia and China creates bifurcation between the world’s nuclear powers. Deteriorating relations between China/Russia and the US/Europe impacts trade and threatens world peace. While a tense geopolitical landscape supports gold, Russia’s move to back its currency with the precious metal could be a gateway for China to follow. 

Over the past years, Russia and China have been high-profile gold buyers, adding to reserves. Since Russian and Chinese stockpiles are state secrets, it is impossible to identify just how much gold the countries purchased. However, since China is the world’s leading gold producer and Russia is third behind Australia, a significant percentage of annual output is likely flowing into the countries’ reserves. 

China has the second-leading economy, and the potential for backing the yuan with gold could significantly impact fiat currency values and the path of least resistance for gold over the coming years. The bottom line is the geopolitical landscape supports a higher gold price. 

Inflation and/or recession could ignite the price

Gold is an inflation barometer, but the monetary tools to control the economic condition are bearish for the metals price. Rising US interest rates increase the cost of carrying long gold positions and make fixed-income investments more attractive. Moreover, higher US interest rates support the US dollar, which rose to a two-decade high over the past weeks. A rising dollar tends to weigh on the gold price. 

Meanwhile, two consecutive quarters of US GDP declines is the textbook definition of a recession, and rising interest rates only increase recessionary pressures. Throughout most of 2021, the US central bank and administration called inflation a “transitory” event, blaming it on supply chain bottlenecks and pandemic-inspired factors. In late 2021, they had an epiphany, and now, fighting inflation is their primary goal. In 2022, the Fed and administration are calling declining GDP a “transition” instead of an economic decline. With the mid-term elections on the horizon, “transition” is a politically correct description they hope will resonate with voters. 

After falling asleep at the wheel on inflation in 2021, the Fed and Washington DC could be doing the same regarding economic contraction in 2022.  In his latest speech on Friday, August 26, Fed Chairman Jerome Powell reiterated the commitment to fighting inflation with monetary policy, saying higher interest rates “are the unfortunate costs of reducing inflation.”
In another sign that the Fed may reserve course despite the Chairman’s latest comments, the July US personal consumption expenditures (PCE) index rose by 6.3%, under the 6.8% rise in June, and far less than the July consumer and producer price index data. Inflation is coming down, and the Fed will continue to attempt to push it to the 2% target level. However, the medicine for inflation may only exacerbate the recessionary pressures, causing the need for a more dovish approach in 2023, which would support gold’s price. 

Gold is a hybrid- More volatile than currencies, but less price variance than commodities

Gold walks a fine line between a financial and commodity or industrial asset. Price variance in the gold market is higher than in currencies but lower than in commodities. 

The chart shows twenty-year historical volatility in gold at the 9.26% level. 

The metric in the dollar index is lower at 5.07% over the same period

In the crude oil futures market, a leading industrial commodity, the historical price variance metric is at 35.98%, far higher than in gold. 

Gold is unique, and the world’s governments validate its position in the financial system. While the world’s leading economy continues to battle inflation with hawkish monetary policy, ignoring the rising recessionary wave could plant the seeds for the next move to a higher high in the over two-decade-long gold bull market. 

Nat-Gas Prices Sink On Lower European Gas Prices And Mixed U.S. Weather

Oct Nymex natural gas (NGV22) on Tuesday closed down -0.294 (-3.15%).  Oct nat-gas Tuesday dropped to a 1-week low on negative carry-over from a -7% slump in European nat-gas prices to a 1-week low.  A mixed U.S. weather outlook also sparked long liquidation in nat-gas futures after the Commodity Weather Group Tuesday said above-normal temperatures are expected in the West and north central U.S. from Sep 4-8, but mild temperatures are expected for the Northeast and South.

Nat-gas prices last Tuesday fell back from a 14-year nearest-futures high on the announcement of a delay in the restart of the Freeport LNG export terminal.  The Freeport terminal said Tuesday that it won’t reopen until early to mid-November, later than a previous announcement of a restart in October.  That will delay an increase in U.S. nat-gas exports and allow U.S. nat-gas storage inventories to build.

Nat-gas prices last Tuesday rose to a 14-year high after Russia said it would halt gas flows through the Nord Stream pipeline to Germany for three days on Aug 31, fueling speculation that the pipeline won’t restart as planned after the maintenance work.  The surge in European nat-gas prices has sent electricity costs soaring as German electricity prices for next year climbed to a record 995 euros a megawatt-hour last Friday, and French electricity prices jumped to a record 1,130 euros a megawatt-hour.  In crude oil market terms, it’s the equivalent of crude at $1,600 a barrel.

Lower-48 dry gas production on Tuesday was 98.3 bcf,  up +6.4% y/y, according to Bloomberg NEF data.   Lower-48 state total gas demand on Tuesday was 73.7 bcf/day, up +7.7% y/y, according to Bloomberg NEF data.  LNG net flow to U.S. LNG export terminals Tuesday was 10.8 bcf/day, down -1.5% w/w.

A decline in U.S. electricity output is bearish for nat-gas demand from utility providers.  The Edison Electric Institute reported last Wednesday that total U.S. electricity output in the week ended Aug 20 fell -3.2% y/y to 86,685 GWh (gigawatt hours).  However, cumulative U.S. electricity output in the 52-week period ending Aug 20 rose +3.1% y/y to 4,124,735 GWh.

Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% over the next eight months.  Also, Russia recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices.  Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, Netherlands, Poland, and Latvia and reduced supplies to Germany for not acceding to its demand for gas payments in Russian rubles.

Nat-gas prices have seen downward pressure from the prolonged outage at the Freeport LNG export terminal, which curbed U.S nat-gas exports and put upward pressure on domestic supplies.   The Freeport terminal accounted for about 20% of all U.S. nat-gas exports before the explosion on June 8 knocked it offline.  The Freeport LNG terminal receives about 2 bcf, or 2.5%, of the output from the lower-48 U.S. states.

As a longer-term bullish factor, the ongoing drought in the U.S. West has drained rivers and reservoirs, with Lake Mead and Lake Powell falling to record lows.  That threatens to curb power produced by hydropower dams and will prompt electric utilities in the U.S. West to boost usage of nat-gas to increase electricity to satisfy power demand for air-conditioning this summer.  The U.S. Energy Information Administration said on June 1 that the drought could drive down generation at California’s hydro dams between June and September to 7 million megawatt-hours, well below the 13 million megawatt-hour median for summer generation between 1980 and 2020.

Last Thursday’s weekly EIA report was bearish for nat-gas prices as it showed U.S. nat gas inventories rose +60 bcf to 2,579 bcf in the week ended Aug 19, above expectations of a +55 bcf increase.  Inventories remain tight and are down -9.5% y/y and -12.0% below their 5-year seasonal average.

Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended Aug 26 fell by -1 to 158 rigs, which was slightly below the 3-year high of 161 rigs posted in the week ended Aug 5.  Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).

Crude Slumps On Reduced Chance For An OPEC+ Production Cut

Oct WTI crude oil (CLV22) on Tuesday closed down -5.37 (-5.54%), and Oct RBOB gasoline (RBV22) closed down -18.58 (-6.84%).  

Crude and gasoline prices Tuesday sold off sharply, with gasoline falling to a 3-week low.  Reduced concern about a cut in OPEC+ crude production weighed on oil prices Tuesday.  Also, Tuesday’s slump in the S&P 500 to a 1-month low curbs confidence in the economic outlook that is bearish for energy demand.

Crude prices retreated Tuesday after Tass reported that OPEC+ is currently not discussing a potential cut in crude production.  Crude prices rallied last week when Saudi Arabia raised the possibility that OPEC+ might need to restrict supply due to a disconnect in oil futures prices.  

Weakness in the crude crack spread is bearish for oil prices as the spread dropped to a 5-1/2 month low Tuesday.  The weaker spread discourages refiners from purchasing crude oil to refine into gasoline.

A supportive factor for crude was weekend comments from Iran that said that talks with the U.S. about reviving a nuclear deal will drag on into next month, curbing speculation that an imminent agreement would lift sanctions against Iran and allow Iranian oil exports onto the global market.  

In a bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -7.8% w/w to 100.70 million bbls in the week ended August 26.

Reduced Chinese crude demand is bearish for prices.  Chinese refineries in July handled the least amount of oil since March 2020 as Covid lockdowns and refinery shutdowns for maintenance undercut crude demand.  As a result, China’s apparent oil demand in July fell -9.7% y/y to 12.16 million bpd, and China’s Jan-July apparent oil demand is down -4.6% y/y to 12.74 million bpd.  

OPEC+ production in July rose by +260,000 bpd to 29.050 million bpd, according to the IEA, but is still running more than 2 million bpd below quotas due to various supply disruptions and capacity constraints.  Nigerian and Libyan crude output has fallen in recent months due to damaged pipelines in Nigeria and political unrest in Libya, undercutting the overall OPEC+ production level.  Crude oil exports from Libya, home to Africa’s largest oil reserves, dropped to a 20-month low of 610,000 bpd in June.  However, Libyan Oil Minister Mohammed Oun recently said that Libya’s crude production should rise to 1.2 million bpd in early August as oil facilities are brought back online.

Crude prices fell slightly from their Tuesday afternoon closing level after the API reported that U.S. crude supplies rose +593,000 bbl last week.  The consensus is that Wednesday’s weekly EIA crude inventories will fall by -950,000 bbl.

Last Wednesday’s EIA report showed that (1) U.S. crude oil inventories as of August 19 were -6.6% below the seasonal 5-year average, (2) gasoline inventories were -7.9% below the seasonal -year average, and (3) distillate inventories were -23.9% below the 5-year seasonal average.  U.S. crude oil production in the week ended August 19 fell -100,000 bpd to 12.0 million bpd, which is only -1.1 million bpd (-8.4%) below the Feb-2020 record-high of 13.1 million bpd.

Baker Hughes reported last Friday that active U.S. oil rigs in the week ended August 25 rose by +4 rigs and matched the July 29 2-1/4 year high of 605 rigs.  U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in U.S. crude oil production capacity.

Elon Musk files another notice to terminate Twitter acquisition, citing additional reasons

• Elon Musk filed another notice on Tuesday to terminate his acquisition of Twitter, citing additional “undisclosed” reasons.
• Twitter shares were down more than 1% in pre-market trade.

https://www.cnbc.com/2022/08/30/elon-musk-files-another-notice-to-terminate-twitter-acquisition-citing-additional-undisclosed-reasons.html

Bullish on Vermilion Energy Inc.

Vermilion Energy VET-T +0.34%increase (Friday’s close $38.07) declined from $49.67 in 2018 to $2.20 in 2020 (A-B) below a falling trendline (dotted line) and below the falling 40-week Moving Average (40wMA). It then settled in a horizontal trading range between $3 and $9 in 2020 and another between $7 and $11 for most of 2021. This price action produced a bullish technical pattern known as a Duplex Horizontal (dashed lines).

The stock had a breakout from this pattern and reached $30.76 (C), but then was far above the 40wMA. It had a correction to its Average and the rising trendline (solid line), where it found good support (D). The stock has since resumed the uptrend (E).

There is good support near $27-$28 and at the 40wMA (currently near $24-$25); only a sustained decline below this level would be negative.

Point & Figure measurements provide targets of $40 and $44. Higher targets are visible.

U.S. Federal Reserve to stay focused on inflation, markets will be volatile: UBS Global Wealth

The U.S. Federal Reserve will not back away from “talking tough” on the markets until there is significant progress on inflation, which will perpetuate volatility into mid-2023, UBS Global Wealth Management’s chief investment officer said on Monday.

Mark Haefele told the Reuters Global Markets Forum he saw the S&P 500 ending the year at 3,900 points and around 4,200 by next summer, compared to its current 4,057 level.

Chair Jerome Powell said on Friday the Fed would raise rates as high as needed to restrict growth and keep them there “for some time” to bring down inflation running well above its 2 per cent target.

Haefele expected the Fed to hike an additional 100 basis points this year, but did not see major recession in the United States.

“We do think that inflation is going to start to come down,” said Haefele, who runs investment strategy for the world’s largest wealth manager with $2.8-trillion in assets.

Fed funds futures priced in as high as a 73 per cent chance it will hike by 75 bps and see rates peaking at 3.75 per cent to 4.0 per cent.

Haefele noted value stocks have always outperformed growth during inflationary periods, providing attractive valuations.

“(Value) is one area where we would be more focused,” he said, adding that many of these opportunities were outside the U.S.

Even as Haefele expected Europe to enter a recession, for which equity markets were already priced, he said there were pockets of value in consumer staples and some defensive sectors such as health care.

While not currently “overweight” on emerging markets (EM), Haefele expected EMs to become attractive once the Fed pivots on policy.

“We’re very focused on when there is a catalyst because many EM stocks are much cheaper than U.S. stocks,” he said. “And so over the longer term, prospects for EM, both in terms of valuation (and) growth rates make it very attractive.”

Canada challenges U.S. softwood lumber duties under USMCA trade pact

International Trade Minister Mary Ng says Canada is formally initiating a challenge against “unwarranted and unfair” U.S. duties on Canadian softwood lumber.

The Canadian government filed notice of the challenge Monday under the U.S.-Mexico-Canada trade agreement’s dispute resolution system.

Ms. Ng says in a statement that the duties harm Canadian businesses and workers but also serve as a tax on U.S. consumers already dealing with inflation and supply-chain issues.

The U.S. cut its anti-dumping and countervailing duty rate in half earlier this month to 8.59 per cent from 17.61 per cent, but Ms. Ng signalled that Canada would still fight the measures.

The crux of the U.S. argument is that the stumpage fees provinces charge for timber harvested from Crown land are akin to subsidies, since U.S. producers must instead pay market rates.

Ms. Ng says that Canada is willing to work toward a negotiated solution in the long-running dispute.

Before the Bell: Aug 30

Equities

Wall Street futures were higher early Tuesday after two negative sessions in a row. European markets were also positive. TSX futures were up with the last of bank earnings due.

In the early premarket period, futures tied to the three key U.S. indexes advanced with Nasdaq futures up more than 1 per cent at one point. On Monday, all three marked another day of declines with the S&P 500 losing 0.67 per cent while the Dow ended down 0.57 per cent and the Nasdaq fell 1.02 per cent. The S&P/TSX Composite Index finished the session 0.19-per-cent lower.

“If the market price action of the last few days is any guide the penny finally appears to have dropped that the Federal Reserve is willing to risk a recession to get inflation under control,” Michael Hewson, chief market analyst with CMC Markets U.K., said.

“[Fed chair Jerome] Powell’s message from last week’s speech at Jackson Hole on Friday, couldn’t have been any clearer, that the Fed would keep going until the job is done, the pity being it took so long for investors to take notice, as stock markets dropped, and bond yields spiked higher.”

In Canada, bank earnings are back at the forefront with results from Bank of Montreal. The country’s other big banks reported results last week.

BMO reported net income, excluding one-off items, of $2.13-billion, or $3.09 a share, in the three months ended July 31, from $2.29-billion, or $3.44 a share, a year earlier.

Quebec-based convenience store giant Alimentation Couche-Tard reports after the close of trading. In the U.S., electronics retailer Best Buy releases its latest quarterly results Tuesday morning.

Overseas, the pan-European STOXX 600 gained 0.80 per cent. Germany’s DAX and France’s CAC 40 were up 1.32 per cent and 1.01 per cent, respectively. Britain’s FTSE 100 gained 0.44 per cent.

In Asia, Japan’s Nikkei closed up 1.14 per cent. Hong Kong’s Hang Seng slid 0.37 per cent.

Commodities

Crude prices pulled back somewhat after the previous session’s sharp gains with recession concerns offsetting worries about supply.

The day range on Brent is US$104.09 to US$105.45. The range on West Texas Intermediate is US$96.48 to US$97.66. Both benchmarks added more than 4 per cent on Monday.

“The one trade that everyone can agree upon is that the oil market will likely remain tight,” OANDA senior analyst Ed Moya said.

“Oil rallied on rising risks of a potential civil war that could put Libyan output at risk and over growing expectations that OPEC+ is positioning themselves to cut production.”

Traders are now awaiting next week’s OPEC+ meeting after some members have suggested that the group could cut output to shore up prices. The meeting is set for Sept. 5.

Later Tuesday, markets will get the first of two weekly U.S. inventory reports with new numbers due from the American Petroleum Institute. Official government figures follow on Wednesday morning.

Analysts are expecting to see a decline in crude stocks by about 600,000 barrels last week.

In other commodities, gold prices were lower, weighed down by a still-high U.S. dollar.

Spot gold was down 0.3 per cent at US$1,732.10 per ounce by early Tuesday morning, having hit a one-month low of US$1,719.56 in the previous session.

U.S. gold futures were also down 0.3 per cent at US$1,744.10.

Currencies

The Canadian dollar was higher, trading around 77 US cents early Tuesday morning, as risk sentiment steadied on global markets.

The day range on the loonie is 76.77 US cents to 77.10 US cents.

There were no major Canadian economics releases due Tuesday. Traders will get June and second-quarter GDP figures from Statistics Canada on Wednesday morning.

On world markets, the U.S. dollar index, which weighs the greenback against a group of world currencies, stood at 108.46, after dropping back from 109.48 overnight, a high not seen since September 2002, according to figures from Reuters.

The U.S. dollar was down 0.27 per cent against the Japanese yen while Britain’s pound gained 0.32 per cent to US$1.1743.

The Australian dollar, often seen as a proxy for risk sentiment, rallied 0.5 per cent, Reuters reports.

In bonds, the yield on the U.S. 10-year note was lower at 3.063 per cent in the predawn period.

Economic news

(9 am ET) U.S. FHFA House Price Index for June.

(9 am ET) U.S. S&P CoreLogic Case-Shiller Home Price Index for June.

(10 am ET) U.S. Conference Board Consumer Confidence Index for August.

(10 am ET) U.S. Job Openings & Labor Turnover Survey for July.

With Reuters and The Canadian Press

US Coast Guard cutter denied entry into Solomon Islands port sparking concerns of China’s growing influence

A United States Coast Guard cutter conducting patrols on an international mission in the Pacific Ocean was denied entry to a port in the Solomon Islands raising concerns about China’s growing influence in the area.

The cutter Oliver Henry was taking part in Operation Island Chief monitoring fishing activities in the Pacific, which ended Friday, when it sought to make a scheduled stop at Guadalcanal, Solomon Islands, to refuel and re-provision, the Coast Guard office in Honolulu said.

There was no response from the Solomon Islands’ government for diplomatic clearance for the vessel to stop there, however, so the Oliver Henry diverted to Papua New Guinea, the Coast Guard said.

https://www.foxnews.com/world/us-coast-guard-cutter-denied-entry-solomon-islands-port-sparking-concerns-chinas-growing-influence