Gold and Silver Info: Crude Modestly Higher ahead of FOMC Meeting

Saturday, November 27, 2010

Crude Modestly Higher ahead of FOMC Meeting

ONG Focus | Insights | Written by Oil N' Gold | Sun Oct 31 10 23:05 ET

Crude oil price climbed higher in Asian session on Monday as USD's decline ahead of the FOMC meeting raised appeal for commodities. Data showing strong manufacturing activities in China also boosted oil prices. Gold kept hovering around 1360. We believe either upside or downside surprise from Fed's QE should benefit positive for gold in the long-term. However, a milder than expected dose of QE may trigger selloff in the metal in the near-term.

Economic data released last Friday were mixed. US GPD grew by an annualized pace of +2% (consensus: +2.2%) in 3Q10, from +1.7% a quarter ago. University of Michigan consumer confidence was revised down -0.2 points to 67.7 in October. While the ‘economic conditions' index rose +3.6 points to 76.6, the ‘expectations index' fell -2.7 points to 61.9.Chicago PMI, however, beat market expectations and improved to 60.6 in October. We believe the set of data should not alter the Fed's decision to announce new QE measure at the meeting this week.

The dollar fell against major currencies with the exception of Japanese yen. The market forecast the size of Fed's new bond-buying program would be $1-2 trillion but it may begin by announcing $500B over several months or $100B per month. Apart from purchasing Treasury securities, the Fed may modify its language used in the accompanying statement. At the Boston Fed conference, Chairman Ben Bernanke said that 'clear communication about the longer-run objectives of monetary policy is beneficial at all times but is particularly important in a time of low inflation and uncertain economic prospects such as the present' and the FOMC will continue to 'actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies'.

China's PMI expanded to 54.7 in October from 53.8 a month ago. This is the fastest growth pace in 6 months and signaled the country's economy can sustain through the government's tightening measures. This is also positive news for the oil market as, according to IEA, China has overtaken the US as the world's largest oil user.

With the exception of gasoline, speculators were bullish on oil sector in the week ended October 26. Net length for crude oil surged +24 441 to 125 271 contracts, the highest level since January 2010. QE anticipations and rise in European oil demand due to strikes in France have helped attracting capitals. Net length for heating oil added +963 to 29 605 contracts but that for gasoline fell -4 404 to 57 683 contracts. Net shorts for natural gas dropped for a second consecutive week, by -8 130, to 165 744 contracts, the lowest level in 8 weeks.

Speculators trimmed long positions in gold and silver but staying positive for PGMs. Net long for gold fell -10 666 to 239 086 contracts while that for silver slipped -2 788 to 26 743 contracts. Prices, however, were a tad higher. Net length for platinum climbed +1 181 to a record of 26 743 contracts while that for palladium gained +851 to 16 134 contracts, only slightly below a record high of 16 185 contracts made in May 2010. Recovery in the auto sector and new emission standard in the US have been buoyant for PGMs as they are mainly used as autocatalytic converters.