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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Gold, silver hurt by rate-hike prospects; oil wobbles

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Ole Hansen -


The market focus has once again firmly switched towards the Fed’s next policy meeting on March 15. Several recent comments from voting members of the Federal Open Market Committee have raised the probability of a rate hike to more than 70 per cent, and the reaction in the market has been clear to see.


The US dollar rose to a seven-week high against a basket of currencies, while the yield on US 2-year government bonds climbed to levels last seen in 2009. Stocks raced higher on Wednesday after President Trump’s speech to Congress on Tuesday evening.


His infrastructure plan, signs of compromising on immigration combined with accelerating manufacturing data all help boost stocks, partly due to leverage funds covering short positions.


The agriculture sector was generally in the black, led by soybeans and wheat. Industrial metals traded flat, with copper struggling to gain any momentum from two major supply disruptions in Chile and Indonesia. Precious metals were hit by profit-taking, as they were in the run-up to the previous two US rate hikes.


Natural gas hung onto a small gain despite seeing the first weekly February injection ever. Total inventories are still expected to be below last year’s when the injection season begins in a month’s time.


Crude oil was lower with traders holding a record non-performing long beginning to reduce exposure. WTI crude oil has swung from a seven-week high to a three-week low in a matter of days. This, however, tells us more about the current tight range than any major change in outlook.


The Bloomberg Commodity Index traded lower for a third week, and it is now down on the year. Despite of this lack of price support, we have seen hedge funds continue to accumulate bullish commodity bets in the futures market during this time. The total net long held across 24 major commodities reached a new record last week of more than 2.4 million lots.


Highlighted below are some of the commodities where speculative bets are above normal and where the risk of corrections are high if underlying fundamentals fail to support. We saw signs of that this week in silver and, not least, oil with its combined net long of more than 900,000 lots or 900 million barrels.


Crude oil ended February more or less where it began and in the process yielded the tightest monthly trading range since early 2004.


Oil remains range-bound, but after failing to break higher the attention has turned to the downside, not least due to the latest US data showing rising stocks and production. Opec’s so far successful effort to cut production has received some attention as it is increasingly driven by Saudi Arabia. Key producers, such as with Iraq, UAE and — the most vocal of them all — Venezuela, have been slow in adjusting production to the agreed levels.


This is creating some nervousness about the longevity of the deal, not least considering how non-Opec contributors, including Russia, are still some distance away from full compliance. As a result of these developments, oil headed for the biggest weekly loss in two months.


Hedge funds, which had been aggressive buyers since late November, are now either holding non-performing or, in worst case, loss-making positions. A record non-performing position in oil is the main reason why we maintain a negative short-term bias and continue to see the risk of Brent crude hitting $50/barrel before $60/b.


A weekly close below $52/b on WTI crude oil and $55/b on Brent raises the risk of additional long liquidation next week.


Gold and silver have once again been hit by a triple headwind. The probability of a US rate hike on March 15 has surged and, with it, we are seeing the dollar and bond yields moving higher. At the same time, the stock market has yet to show any sign of hitting the buffer.


March 15 is turning into a day full of key event risks. Not only do we have the expected rate hike from the FOMC and expiry of the US debt ceiling holiday, we also have the Dutch election, the first of three important elections this year in Europe.


The last two times the FOMC raised rates gold reacted negatively in the run-up to the announcement, only to rally afterwards. In December 2015, gold lost 2 per cent during the month leading up to the hike, only to rally by 2.6 per cent the following month. The before-and-after reaction to December 2016 was a drop of 5 per cent (Trump’s election win playing its part) followed by a 3.4 per cent rally. [Ole Hansen is Head of Commodity Strategy / Saxo Bank]


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