Commodities Rebound Strongly on Irish Bailout. Outlook Mixed

ONG Focus | Insights | Written by Oil N' Gold | Thu Nov 18 10 07:50 ET

Commodities rebounded strongly in European session as dollar's retreat raised demand for risky assets. Currently trading at 81.8, the front-month contract for WTI crude oil price rose for the first time in 5 days. Price had surged to 88.63 on November 11 before slumping to 1-month low of 80.6 yesterday. Similarly, gold also jumped to as high as 1358.2 after being pressured over the past 4 days.

Irish central bank Governor Patrick Honohan said the country will 'absolutely' ask for bailout from EU/IMF. The loan will be as 'substantial' as 'tens of billions' of euro as 'the purpose of the amount to be advanced, or to be made available, is to show Ireland has sufficient firepower to deal with any concerns of the market'. The euro as well as other currencies rebounded against the dollar after the news amid expectations the bailout may avoid contagion to other peripherals. Meanwhile, Spain sold 2.59B euro of 10-year bonds and 1.07B euro of 30-year bonds, both at low yields than similar traded securities. Investors turned more confident as Ireland will likely seek financial assistance.
While the bailout may lift optimism in the near-term, whether the debt crisis in the Eruozone is solved remains uncertain. Look at Greece. The country finds it difficult to achieve its target on deficit reduction after tapping funds from EU/IMF earlier this year. Austrian Finance Minister Josef Proell threatened that he might withhold his country's share of the rescue package because Greece's failure to achieve its goals. Indeed, after Ireland is bailed out, market's focus will turn to Portugal and Spain. Ongoing sovereign woes in the Eurozone should threaten market confidence.

Fed's QE2 has recently driven heated debate. While it has received lots of criticism from economists and finance officials, the OECD said today that the central bank should 'continue to support growth, as inflation remains well contained and the economy continues to run well below capacity'. In addition to keeping policy interest rates broadly unchanged in 2011, the Fed could also 'reaffirm its commitment to price stability by adopting an explicit medium-term inflation target. If growth turns out to be significantly weaker than projected, action to lower real long-term rates via further quantitative easing would be justified, notwithstanding uncertainties associated with the use of such unconventional policy tools'.

In its latest global economic outlook, the OECD revised down the world's GDP forecasts to +4.2% for 2011 from +4.5% projected in May. Among OECD economies, total growth will be +2.3% in 2011. Growth in the US was revised the most significantly to +2.7% in 2011 from +3.2% in May's estimate.

 

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Rally in Oil Prices Resumes as Inventories Drew. USD's Rebound Stalls

ONG Focus | Insights | Written by Oil N' Gold | Wed Nov 10 10 23:54 ET

The dollar's rebound stalled as risk appetite increased after initial jobless claims data dropped -22K to 435K, compared with consensus of 450K, last week. This upstaged sovereign concerns in Ireland and a rise in China's RRR. Treasuries rose after the Fed announced to buy $100B of bonds during the next 30 days and the 30-year bond auction was completed. Fed's plan reminded us of its committed participation in the market. Commodities were pressured initially as the dollar rebounded, loss were pared later in the NY session as US' recovery lost steam. The front-month contract for WTI crude oil jumped to a new 2-year high of 88.21 before settling at 87.81, up 1.26%. An unexpectedly bullish inventory report has helped the rally.

A tug of war between bulls and bears was seen in gold trading. The rally after Fed's QE2 announcement has sent the metal above 1400. While factors such as China's RRR hike, margin changes in silver futures and overextended rally justify a correction in the near-term, persistent currency tensions and sovereign crisis in peripheral European economies should keep gold supported. We expect gold will remain in consolidation these few days.

Investors remained unnerved although Irish central bank Governor Patrick Honohan reassured the country will go back to the bond market next year. Honohan said that the budget plan, including 6B euro in spending cuts and tax increases for 2011, is a 'credibly convergent path' and 'a good basis for rebuilding confidence'. These comments failed to ease market worries and Irish 10-year yields surged to a new high of 8.6% amid expectations that the plan will not be approved. Portuguese bond yields also rose as the likelihood of a bailout by the European Financial Stability Facility has also increased.

Fed's new round of easing has driven capital flows to higher-yield investments in emerging markets. In order to curb excessive liquidity from overseas, China has recently stepped up control measures. Yesterday, the People's Bank of China announced its first national increases in reserve requirement ratio for banks. The percentage of amount lenders have to set aside is increased by 0.5%. The move triggered declines in stocks currencies and commodities.

It's increasingly likely that easing measures from advanced economies will result in protectionism. International disputes regarding trades and currencies should last for a prolonged period of time. We believe the situation is positive for gold for it is a traditional safe haven and a tool for portfolio diversification.

World Bank President Robert Zoellick clarified his comments on gold standard. While Zoellick said he doesn't believe we can return to gold standard, he said 'markets are already using gold as an alternative monetary asset because confidence is low. Policymakers need to consider this as an indicator about how markets are viewing their policies'. We believe his comments help justify recent rally in gold and indicate that the metal's strength should be well-supported as long as world central bankers continue to employ existing monetary policies.

 

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<b>Gold</b> Slides as Dollar&#39;s Rebound Reduces Investment Demand for Commodities

Gold prices declined as the dollar rebounded, reducing demand for the metal as an alternative investment.

The greenback climbed from a 10-month low against a basket of six major currencies. Gold reached a record $1,388.10 an ounce yesterday. This week, the metal advanced 2 percent, the fifth straight gain.

“People are selling physical metal at these levels,” said Matthew Zeman, a trader at LaSalle Futures Group in Chicago. “With the run-up we’ve had, it’s not surprising to see some profit-taking.

Gold futures for December delivery fell $5.60, or 0.4 percent, to close at $1,372 at 1:59 p.m. on the Comex in New York.

Gold for immediate delivery dropped $13, or 0.9 percent, to $1,368.15 at 2:40 p.m. New York time. Before today, the price climbed 26 percent this year, heading for the 10th straight annual gain.

“Over the medium term, there is still no evidence of an imminent end to the decade-long bull market for precious metals” because of “serious uncertainty about the worldwide macroeconomic trend,” Tiberius Asset Management AG, based in Zug, Switzerland, said in a report

The metal has rallied as central banks and governments maintained low borrowing costs and spent trillions of dollars to stimulate economies.

Silver futures for December delivery slipped 14.7 cents, or 0.6 percent, to $24.288 an ounce on the Comex. The metal jumped 5.1 percent this week and has surged 44 percent this year.

Platinum futures for January delivery fell $17.20, or 1 percent, to $1,695.40 an ounce. The price, down 0.8 percent this week, has climbed 15 percent in 2010.

Palladium futures for December delivery declined $12.35, or 2.1 percent, to $589.20 an ounce. The metal, up 0.3 percent this week, has gained 44 percent in 2010,

To contact the reporters on this story: Yi Tian in New York at Ytian8@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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