Gold pirouettes as Donald Trump takes to Twitter

Ole Hansen -

The commodity sector was heading for the highest weekly close since July. The Bloomberg Commodity Index which tracks the performance of 22 major commodities evenly split between energy, metals and agriculture moved higher following a couple of weeks of sideways trading.

The year-to-date return of just 1.6 per cent has been driven by broad-based gains in metals, both industrial and precious metals, while being held back by losses in the energy sector. All of the six major energy futures contract from oil and products to natural gas can be found at the bottom of the performance table.

President Donald Trump continues to move markets with his comments and this past week was no exception. Without offering any details his promise of a “phenomenal tax announcement” within weeks helped send the dollar, stocks and bond yields higher.

Gains past weeks were driven by industrial metals with copper receiving a boost from strike action in Chile while a monthly supply and demand report for key crops help lift CBOT wheat to a seven-month high. Gold almost touched our short-term target of $1,250/oz before retracing lower on Trump’s tax cut promise while oil received a late boost from confirmation of high Opec compliance.

CBOT wheat made a rare appearance at the top of the performance table last week. A bullish supply and demand report from the US Department of Agriculture helped trigger short-covering from funds who have held a net-short futures position since July 2015. The outlook towards rising US export, reduced Indian production and robust Chinese demand helped trigger a revision of where the USDA sees global inventories at the end of the 2016/17 season.

HG Copper was supported by the outbreak of strike action at the BHP Billiton’s Escondida mine in Chile. A 30 per cent rally in copper during the past year has helped trigger demand for a bigger share of the revenues from miners at the world’s largest mine.

The dispute is being watched by unions and owners of other mines around the world with several contracts up for renewal this year. A reduction in supply from this and potentially other mines carries the risk of supply undershooting demand.

HG Copper has traded sideways after rallying strongly back in November. Funds hold a record long futures position, the equivalent of 1.1 million tonnes, in the belief that the upside will provide the least resistance. Resistance is at $2.74/lb, which equates to $6,000/t on LME copper, while a band of support can be found between $2.61 and $2.58/lb.

Gold hit a three-month high as political uncertainty spread from the US to Europe. Greek worries resurfaced while key elections in Germany, France and Holland this year could alter the political landscape. After almost hitting our short-term target at $1,250/oz, Trump’s renewed talk of tax cuts helped send the price looking for support.

A “phenomenal tax announcement” as the president called it, helped send stocks, dollar and bond yields higher thereby reversing some of the support that earlier in the week helped send gold to a year-to-date gain of more than 8 per cent.

A correction was overdue after gold almost managed to recoup half of what had been lost during the July to December selloff. Underlying demand has improved with hedge funds showing signs of returning. This after having cut net-long positions by 88 per cent from last July’s record up until early January.

We will be looking for support to be established again between $1,220/oz and no lower than $1,205/oz.

Crude oil remains rangebound but received a boost from the International Energy Agency’s Monthly Oil Report. The IEA confirmed that Opec had implemented 90 per cent of the promised output cuts during January. At the same time, it lifted the outlook for global demand which will help the process of reducing the overhang of supply.

In addition to the Opec cuts, the IEA saw a 269,000 barrels/day reduction from the 11 non-Opec members who back in December signed up to reduce production by 558,000 b/d. Russia has so far cut its production by one-third of the promised 300,000 b/d, with the rest to be staggered.

Crude oil jumped almost 2 per cent in response to these price supportive developments. With the good news on compliance now confirmed, the challenge remains to keep this high level for another five months. Simultaneously, the market must hope that production from Libya and Nigeria will not rise too fast. Taking the production increase from these two countries into account, Opec’s overall compliance drops to somewhere between 60 and 70 per cent.

Brent crude oil has been rangebound between $54/barrel and $58/b since early December with an average price during this time of around $55.50/b. These latest developments do not alter our view that the market remains rangebound for now.

Hedge funds holding a record 1 billion barrels of long positions in WTI and Brent crude oil futures have so far not been presented with an excuse to book profit. As long this is being maintained the risk of a sharp correction can be avoided.

Brent crude oil remains stuck in a range with support at $54 and a band of resistance between $57.50/b and $58/b.

[Ole Hansen is Saxo Bank’s head of commodities strategy]