Weekly Fundamentals - Risky Assets Tumbled amid Concerns on China's Rate Hike, Bailout in Ireland

Market's focus shifted from Fed's QE2 to G20 currency and trade tensions, and then to possible bailouts of peripheral European economies by the EU. Robust macroeconomic data in China initially boosted market sentiment and drove growth asset prices higher. However, speculations that the government will accelerate tightening measures by raising interest rates dampened risk appetite.

The dollar rebounded across the board as financial leaders and economists from around the world criticized US' easing measures. Moreover, CDS and yield spreads between peripheral European bonds and German bunds widened sharply, signaling sovereign concerns in these countries were once again put under the spotlight. G20 leaders' deep discussion about the issue evidenced seriousness of the situation.

In response to US President Obama's criticism that China has spent 'enormous amounts of money intervening in the market' to keep RMB 'undervalued', China's President Hu Jintao reaffirmed that the country will 'continue to improve its currency reform at a steady pace'. It will also balance the trade gap by 'boosting domestic demand'. In our opinion, the G20 meeting failed to resolve international trade imbalances. Despite the pledge to work on 'indicative guidelines' to avoid sustained current-account imbalances that require preventive and corrective actions to be taken, the lack of actionable clarity suggests that individual countries will continue to use their own ways to achieve their goals.

WTI crude oil climbed higher earlier in the week and rallied to a new 2-year high of 88.63 Thursday as a surprising decline in petroleum inventories and stronger-than-expected Chinese macroeconomic data boosted sentiment. Upgrades in global oil consumption by EIA, OPEC and IEA also sent oil prices higher. However, gains were erased amid intensified sovereign concerns in peripheral European economies and increasing possibility of a rate hike in China. The front-month WTI contract tumbled to 84.52, the lowest level in a week, before settling at 84.88 on Friday.

Major oil agencies raised their forecasts on global oil demand for 2010 and 2011, as growth in OECD consumption exceeded expectations after 1Q10. Taking an average from the forecasts made by EIA, OPEC and IEA, global oil demand will increase +2.33% y/y to 86.48M bpd in 2010, followed by a +1.44% gain to 87.72M bpd in 2011. To meet the rises in demand, supplies from both non-OPEC and OPEC countries will have to increase.

OPEC's 11 members bearing quotas produced 26.89M bpd, the highest level since December 2008, with compliance falling to 51.3% in October. While oil ministers have urged member countries to adhere more strictly to quotas (OPEC - 11 to produce no more than 24.845M bpd), many of them produce excessively so as to benefit from recent rally in oil prices. Similarly, IEA also estimated a modest drop in compliance to 55% in October from 56% a month ago.

Among the OPEC-11, Saudi Arabia, UAE and Kuwait produced with highest compliance while Nigeria and Angola exceeded their implicit quotas the most. Nigeria and Angola have argued that their quotas were assigned based on low production levels when the countries were having either operational problems or militant activities.

Although monetary tightening may curb commodity consumptions, other measures from China may help boost oil prices. The Chinese government's control on power supply has led factories to using their own power generations. According to the National Bureau of Statistics, China's oil processing in October rose +12% y/y 8.8 M bpd. Meanwhile, there are increasing expectations that China may return to a net importer of diesel after being a net exporter since October 2008. Indeed, China's net exports of diesel fell for a second consecutive month to 55K bpd in September.

Seasonally, China's demand for liquid fuels is typically the strongest in the second and third quarters. The pickup in demand in coming month as a result of governmental policy may tighten the supply outlook in 4Q which is usually a peak demand season for the US and Europe.

Gas price tumbled as US storage surged to a record high last week. According to the US Energy Department, gas stocks rose +19 bcf to 3840 bcf in the week ended November 5. Supplies were +31 bcf higher the same period last year and +342 bcf, or +9.8%, above the 5-year average of 3498 bcf. Separately, Baker Hughes reported that gas rig counts stayed unchanged at 955 units in the week ended November 12.

In its Short-term Energy Report, the EIA forecast that total natural gas consumption will grow by +4.3% to 65 bcf/day in 2010, followed by a modest rise to 65.4 bcf/day in 2011. The growth in 2010 is largely due to 'increases in industrial and electric power sector consumption of natural gas. Hot weather in the summer and low natural gas prices drove the increased use of natural gas for electric power generation in 2010'. However, natural gas consumption for electric power generation will fall slightly in 2011, even as natural gas prices drop, due to a drop in cooling-degree days. Residential consumption of natural gas, which remains flat from 2009 to 2010, will rise +1.8% in 2011. Commercial and residential consumption will remain flat in 2010 and rise slightly in 2011. Meanwhile, the EIA revised up its production forecasts for 2010 and 2011.However, drilling activities will fall modestly in 2011 because of relatively lower natural gas prices.

Rising inflationary concerns, renewed sovereign concerns and strong Asian buying sent gold to fresh record highs and silver to new 30-year highs. While it takes time for the Fed to bring inflation back to levels that are consistent with its mandate, the return to QE have driven enormous capitals to countries with higher yields. Emerging countries such as China and South Korea are expected to record higher CPI in coming months. Indeed, capital inflows in China have been surging despite Government's tightening measures. China's CPI surged +4.4% y/y in October, beating market expectations of +4% and September's +3.6%, as driven by rental and cotton prices. New lending reached RMB 588B, compared with market expectation of RMB 450 B. It's likely that annual lending will reach RMB 8 trillion, exceeding the government target of RMB 7.5 trillion. Other data, such as IP, fixed asset investment and retail sales, expanded in annual terms but came inline with market forecasts. Stubbornly-high inflation and net loans triggered the PBOC to raise RRR by 50 bps. We expect inflation will rise further in November and the government will need to accelerate measures to curb potential asset bubbles.

Although ease in European sovereign triggered selloff in gold price last Friday, uncertainty remains and should lend support to the metal. As the Fed provide more liquidity to boost economic growth, the more the euro will strengthen against the dollar. Appreciation in the single currency is precarious for growth and prolongs the recovery process. We believe the impact will be more serious on debt-ridden countries.

Gold and silver correlations with EURUSD have fallen sharply over the past week, suggesting euro's weakness because of sovereign concerns may not necessarily weigh on precious metal prices. Indeed, investors may turn to these metals as safe-haven assets as they lose confidence in fiat currencies.

Indian festival Diwali officially began on November 5. The festival typically indicates the seasonal peak in Indian gold buying. According to the Bombay Bullion Association, gold imports jumped +25% y/y during the festival week despite elevated prices.

Similar to others in the commodity sector, base metals soared on strong Chinese industrial production data. Prices tumbled on Friday amid speculations that China's central bank will raise interest rates to curb inflation.

Copper traded with high volatility with the LME contract rising to a new record high of 8966 on Thursday before settling at 8615 on Friday.

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Weekly Fundamentals - QE2 Decisions the Key Event Risk Next Week

The story in financial markets remained largely the same in recent weeks. Fed's return to QE next week is a certain event. The unknown now is the size and the timing of bond purchases. The Fed has considered a wide range of options. For example, the Fed may start the program by announcing $500B, spanning over several months. It may also purchase $75-100B per month. The plan will be review in every FOMC meeting and should not stop unless economic outlook improves. Economists forecast that the ultimate size of the program will be around $1-2 trillion.

The BOJ brought forward the next meeting to November 4-5 so as to act swiftly after the Fed announces new easing measures. Last week, the BOJ said it would buy corporate debts with lower credit ratings than it previously purchased, including BBB rated corporate bonds and a-2 commercial paper. The central bank would also buy 1.5 trillion yen of government debt, 450B yen in ETFs and 50B yen of REITs.

The RBA, ECB and BOE will also meet next week. While we believe all of them will leave policy rates unchanged, BOE policymakers will continue to dispute whether to expand the asset-buying plan, staying sidelined and begin tightening. In October, policymakers voted 7-1-1 to leave the Bank Rate unchanged at 0.5% and the asset buying program at 200B pounds.

WTI crude oil has been moving within a range of 80-83 in recent weeks. While the dominating factor driving price lower on weekly basis is strength in USD, bigger-than-expected crude oil inventory signaled US slowdown should hurt the fundamentals.

China's National Development and Reform Commission (NDRC) increased retail gasoline and diesel prices by +3%, the first adjustment since June and the first hike since April. Since the new mechanism - price adjustment will be made should international oil benchmarks fluctuate by more than 4% over 22 working days- was introduced in December 2008, only 12 adjustments were made. While we do not expect the price hike would have much impact on end-user demand, it should benefit domestic refiners and reduce export margins for gasoline and diesel.

In September, exports of gasoline increased +5.16% on monthly basis but plunged -23.70% from a year ago. Exports for diesel slipped -7.25% from August but surged +25.31% from the same period last year. After the price hike, exports will remain flat or modestly lower in coming months. However, we do not expect China to return to a net importer of these fuels.

Another good news for Chinese refiners is that the NDRC may release a 'more transparent' oil product pricing mechanism by the end of this year. It's expected, under the new mechanism, fuel prices will be adjusted when international oil prices change 2% in 10 working days. The move would be positive to refiners as domestic fuel prices will move more coherently with international prices.

US natural gas unexpectedly rallied last week with the benchmark contract rising to a 6-week high amid speculations that cooler-than-normal weather in coming weeks would spur demand.

Gas storage gained +71 bcf to 3754 bcf in the week ended October 22. Stocks were -1 bcf below the same period last year and -312 bcf, or +9.1%, above the 5-year average of 3 442 bcf. Separately, Baker Hughes reported that the number of gas rigs added +2 units to 967 units in the week ended October 29.

Gold rebounded strongly on Friday as the dollar slumped after weaker-than-expected US GDP report. The metal's movement has closely tied to currency movements and QE expectations. Therefore, the FOMC meeting next week will be a key for gold's outlook.

The market has fully priced in the Fed will announce new QE measures next week. There have been heated debates on the size and timing of the program. While the majority of economists expect the central bank will need a total of $1-2 trillion for the whole bond-buying program, some believed that the Fed may use a more gradual approach, such as announcing $500B for 6 months or buying $100B per month with re-evaluation of the program on every FOMC meeting. A smaller-than-expected amount will disappoint the market and hurt sentiment. Yet, we believe gold will be less affected than oil and base metals, should there be disappointments. Gold price indeed may rally, after initial selloff, as insufficient QE will probably trigger downgrades in US growth. This could accelerate inflows into gold investments.

Meanwhile, physical demand has provided a cushion for price. According to the Bombay Bullion Association, gold imports to India may exceed 50 metric tons in October. Buying has been driven by the Hindu festival of Diwali on November 5.

Despite a +2.45% gain on weekly basis, gold plunged in 2 out of the last 5 trading days. The correlation between gold prices and the EURUSD has moved firmly into positive territory with rolling 3-month and 1-month correlations reaching 80%. The correlation between the 2 was negative 2 months ago.

The euro was weighed down by renewed sovereign crisis in peripheral European economies last week. The woes resurfaced as the Portuguese government failed to approve a debt-consolidation plan. In other peripheral nations, Greek Finance Minister George Papaconstantinou the country has 'serious tax compliance issues and a review of Greece's 2009 Budget showed the deficit was above +15% of GDP, exceeding previous projections. In Ireland, note holders of Anglo Irish Bank Corp plan to oppose a debt exchange worth 20% of their 1.6B euro of securities. The current situation is different from the one we experienced in May/June when sovereign woes in the Eurozone destroyed confidence in the single currency and spurred demand for safe-haven assets such as USD and precious metals. At that time correlation between gold and USD was temporarily positive while that between gold and EURUSD was negative.

The complex declined last week with losses ranging from 0.89% to 3.54%. While fundamentals remained supportive, concerns over Fed's QE measures damped sentiments and triggered profit-taking from previous long positions.

LME copper for 3-month delivery surged to a 27-month high of 8554 earlier in the week as both JP Morgan and Blackrock will launch physically-backed copper ETFs. However, sky-high price triggered profit-taking and copper tumbled to as low as 8140 before settling at 8220 on Friday.

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Weekly Fundamentals - G-20 Agrees to Refrain from Competitive Devaluation

Macroeconomic developments and related market sentiment continued to dominate the commodity market. Earlier in the week, US Treasury Secretary Timothy Geithner reiterated the 'strong dollar' mandate while People's Bank of China surprisingly raised both the deposit rate and lending rate by +25 bps. The moves pressured commodities. Prices fluctuated throughout the week as speculations for QE remained but some investors, as the November FOMC meeting approaches, worried that easing measures announced by the Fed would be milder than previously expected.

Finance ministers said, after the G-20 meeting in South Korea, that countries agreed to 'move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies'. Meanwhile, the G-20 also agreed to strengthen the IMF's role in managing the world economy and to allocate more voting rights to emerging markets. According to IMF Managing Director Dominique Strauss-Kahn, policymakers agreed on a 'biggest reform ever' as, in order to increase the role of emerging markets, Europe will surrender 2 seats on the on IMF's 24-member executive board and a majority of countries will shift more than 6% quotas to under- represented countries.

World financial leaders have been striving to ease currency tensions stemming from global economic imbalances. Gold may fall in the coming week as the 'joint agreement' signals policymakers' determination to ease tensions. Yet, we doubt if the effectiveness of these efforts and remain bullish for the gold in the long-term.

Crude oil moved in a volatile range, showing little direction, last week with the WTI contract for December delivery ending the week -0.29% lower. Oil prices rebounded on Friday amid news that France is importing a large amount of fuel and using reserves to meet the market demand. We believe the impact of French labor action on US oil supplies would be small given ample stockpiles in the US.

Strikes, protests and demonstrations in France in opposition to a government bill to raise the age for a minimum pension from 60 to 62 have caused shutdowns of oil refineries and led to fuel shortages. According to French Energy Minister Jean-Louis Borloo, the country is importing 120K cubic meters of fuel a day and has 7M cubic meters of fuel reserves. Refinery disruption in France has raised concerns about oil supply to the US as France is the 4th largest gasoline exporter to Europe and a key exporter to the US. Indeed, the impact would be limited, as the US has ample fuel supplies, unless labor actions persist for a long period of time.

The US imported 12.602M bpd in July 2010, of which only +0.26% was from France. Considering Europe as a whole, the regions exported +16.7% of gasoil/diesel to the US in 2Q10 while exports of jet/kerosene were insignificant. Meanwhile, fuel stockpiles in the US remain ample with both gasoline and distillate inventories staying markedly above 5-year average. We believe the temporary disruption in France should not have much impact on the US market.

Tropical Storm Richard may be another support for oil prices. The US National Hurricane Center Tropical Storm said Richard gained strength and 'most of the intensity models respond to this by intensifying Richard into a hurricane'. Yet, meteorologists do not think it would threaten oil facility in the Gulf of Mexico. Therefore, any lift on prices will be short-lived.

Gas slumped as storage soared +93 bcf to 3683 bcf in the week ended October 15. Stocks were -48 bcf below the same period last year and +286 bcf, or +8.4%, above the 5-year average of 3397 bcf. Increase in gas storage has accelerated since mid-September, indicating a bearish outlook for demand/supply balance. Yet, demand may improve later in the year as price has plummeted to a level that should encourage using gas as a substitution for coal.

Gold contracted for the first time in 6 weeks as USD rebounded. The benchmark contract plummeted to 1315.6, the lowest level in more than 2 weeks, before settling at 1325.1, down -3.42%. The G-20 meeting over the weekend and the FOMC meeting in early November would be key catalysts for gold's outlook in coming weeks.

As we mentioned before, the long-term outlook for gold remains bullish despite near-term corrections as currency tensions, QE from central banks and sovereign crisis in peripheral European economies are factors supporting the uptrend.

The yellow metal has been rallying over the past several weeks as speculations for Fed's return to QE weakened the dollar. As the FOMC meeting approaches, the market began to worry that easing measures announced by policymakers may be less aggressive than the market has priced in. This was a reason for the dollar's rebound last week. In fact, we believe both situations - aggressive QE and mild QE- would be gold-positive.

If the Fed announces measures that exceed market expectations, the dollar will be under tremendous pressure. While weakness in USD benefits gold, capital inflows for gold as an inflation-hedge will also surge. If the central bank disappoints the market by beginning the QE will only a small amount, the dollar may rebound temporarily. However, investors will soon price in more downside risks for US' economic recovery and this should again spur gold purchase as a safe-haven asset.

Failure to test $25 led to a sharp fall in silver price. Over the week, the benchmark contract dived -4.82% and was the worst performer in the commodity sector. Yet, the decline was insignificant compared with the lucrative +36.5% rally since the beginning of the year.

Following gold's suit, silver surged amid speculations of Fed's QE. The 'poor people's gold' has stayed at elevated levels after making a new 30-year high last week. AT the same time, the gold /silver ratio has dropped to 56.13, the lowest level in more than 2 years, signaling silver's outperformance to gold. Investors to be cautious about a deep correction as it's uncertain how long investment demand can support silver's rally as growth in supply has been outpacing that of demand.

Although unexpected rate hike in China triggered profit-taking, recovery was seen later in the week as sentiment remained positive for the complex. Yet, due to divergence in fundamental outlook, price movements of individual metals differed.

Launch of physically - backed ETF on base metals has recently been a hot topic and impacts on the demand/supply outlook have been widely discussed. Aluminum will likely be the first industrial metal ETF in the market. We expect an ETF should help eliminate the huge aluminum stockpile and lend support to price.

That said, launch of physically-backed ETF is not without risk. For example, notional storage costs for the base metals are much higher than for precious metals. Moreover, the cost of storage built into a physically-backed ETF will make it underperform that of an index-linked ETF. As a physically-backed ETF increases demand and raises the price of a certain metal, higher metal price may induce substitution and eventually deteriorate the fundamental of that metal.

View the original article here

Weekly Fundamentals - G-20 Agrees to Refrain from Competitive Devaluation

Macroeconomic developments and related market sentiment continued to dominate the commodity market. Earlier in the week, US Treasury Secretary Timothy Geithner reiterated the 'strong dollar' mandate while People's Bank of China surprisingly raised both the deposit rate and lending rate by +25 bps. The moves pressured commodities. Prices fluctuated throughout the week as speculations for QE remained but some investors, as the November FOMC meeting approaches, worried that easing measures announced by the Fed would be milder than previously expected.

Finance ministers said, after the G-20 meeting in South Korea, that countries agreed to 'move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies'. Meanwhile, the G-20 also agreed to strengthen the IMF's role in managing the world economy and to allocate more voting rights to emerging markets. According to IMF Managing Director Dominique Strauss-Kahn, policymakers agreed on a 'biggest reform ever' as, in order to increase the role of emerging markets, Europe will surrender 2 seats on the on IMF's 24-member executive board and a majority of countries will shift more than 6% quotas to under- represented countries.

World financial leaders have been striving to ease currency tensions stemming from global economic imbalances. Gold may fall in the coming week as the 'joint agreement' signals policymakers' determination to ease tensions. Yet, we doubt if the effectiveness of these efforts and remain bullish for the gold in the long-term.

Crude oil moved in a volatile range, showing little direction, last week with the WTI contract for December delivery ending the week -0.29% lower. Oil prices rebounded on Friday amid news that France is importing a large amount of fuel and using reserves to meet the market demand. We believe the impact of French labor action on US oil supplies would be small given ample stockpiles in the US.

Strikes, protests and demonstrations in France in opposition to a government bill to raise the age for a minimum pension from 60 to 62 have caused shutdowns of oil refineries and led to fuel shortages. According to French Energy Minister Jean-Louis Borloo, the country is importing 120K cubic meters of fuel a day and has 7M cubic meters of fuel reserves. Refinery disruption in France has raised concerns about oil supply to the US as France is the 4th largest gasoline exporter to Europe and a key exporter to the US. Indeed, the impact would be limited, as the US has ample fuel supplies, unless labor actions persist for a long period of time.

The US imported 12.602M bpd in July 2010, of which only +0.26% was from France. Considering Europe as a whole, the regions exported +16.7% of gasoil/diesel to the US in 2Q10 while exports of jet/kerosene were insignificant. Meanwhile, fuel stockpiles in the US remain ample with both gasoline and distillate inventories staying markedly above 5-year average. We believe the temporary disruption in France should not have much impact on the US market.

Tropical Storm Richard may be another support for oil prices. The US National Hurricane Center Tropical Storm said Richard gained strength and 'most of the intensity models respond to this by intensifying Richard into a hurricane'. Yet, meteorologists do not think it would threaten oil facility in the Gulf of Mexico. Therefore, any lift on prices will be short-lived.

Gas slumped as storage soared +93 bcf to 3683 bcf in the week ended October 15. Stocks were -48 bcf below the same period last year and +286 bcf, or +8.4%, above the 5-year average of 3397 bcf. Increase in gas storage has accelerated since mid-September, indicating a bearish outlook for demand/supply balance. Yet, demand may improve later in the year as price has plummeted to a level that should encourage using gas as a substitution for coal.

Gold contracted for the first time in 6 weeks as USD rebounded. The benchmark contract plummeted to 1315.6, the lowest level in more than 2 weeks, before settling at 1325.1, down -3.42%. The G-20 meeting over the weekend and the FOMC meeting in early November would be key catalysts for gold's outlook in coming weeks.

As we mentioned before, the long-term outlook for gold remains bullish despite near-term corrections as currency tensions, QE from central banks and sovereign crisis in peripheral European economies are factors supporting the uptrend.

The yellow metal has been rallying over the past several weeks as speculations for Fed's return to QE weakened the dollar. As the FOMC meeting approaches, the market began to worry that easing measures announced by policymakers may be less aggressive than the market has priced in. This was a reason for the dollar's rebound last week. In fact, we believe both situations - aggressive QE and mild QE- would be gold-positive.

If the Fed announces measures that exceed market expectations, the dollar will be under tremendous pressure. While weakness in USD benefits gold, capital inflows for gold as an inflation-hedge will also surge. If the central bank disappoints the market by beginning the QE will only a small amount, the dollar may rebound temporarily. However, investors will soon price in more downside risks for US' economic recovery and this should again spur gold purchase as a safe-haven asset.

Failure to test $25 led to a sharp fall in silver price. Over the week, the benchmark contract dived -4.82% and was the worst performer in the commodity sector. Yet, the decline was insignificant compared with the lucrative +36.5% rally since the beginning of the year.

Following gold's suit, silver surged amid speculations of Fed's QE. The 'poor people's gold' has stayed at elevated levels after making a new 30-year high last week. AT the same time, the gold /silver ratio has dropped to 56.13, the lowest level in more than 2 years, signaling silver's outperformance to gold. Investors to be cautious about a deep correction as it's uncertain how long investment demand can support silver's rally as growth in supply has been outpacing that of demand.

Although unexpected rate hike in China triggered profit-taking, recovery was seen later in the week as sentiment remained positive for the complex. Yet, due to divergence in fundamental outlook, price movements of individual metals differed.

Launch of physically - backed ETF on base metals has recently been a hot topic and impacts on the demand/supply outlook have been widely discussed. Aluminum will likely be the first industrial metal ETF in the market. We expect an ETF should help eliminate the huge aluminum stockpile and lend support to price.

That said, launch of physically-backed ETF is not without risk. For example, notional storage costs for the base metals are much higher than for precious metals. Moreover, the cost of storage built into a physically-backed ETF will make it underperform that of an index-linked ETF. As a physically-backed ETF increases demand and raises the price of a certain metal, higher metal price may induce substitution and eventually deteriorate the fundamental of that metal.

View the original article here

Weekly Fundamentals - G-20 Agrees to Refrain from Competitive Devaluation

Macroeconomic developments and related market sentiment continued to dominate the commodity market. Earlier in the week, US Treasury Secretary Timothy Geithner reiterated the 'strong dollar' mandate while People's Bank of China surprisingly raised both the deposit rate and lending rate by +25 bps. The moves pressured commodities. Prices fluctuated throughout the week as speculations for QE remained but some investors, as the November FOMC meeting approaches, worried that easing measures announced by the Fed would be milder than previously expected.

Finance ministers said, after the G-20 meeting in South Korea, that countries agreed to 'move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies'. Meanwhile, the G-20 also agreed to strengthen the IMF's role in managing the world economy and to allocate more voting rights to emerging markets. According to IMF Managing Director Dominique Strauss-Kahn, policymakers agreed on a 'biggest reform ever' as, in order to increase the role of emerging markets, Europe will surrender 2 seats on the on IMF's 24-member executive board and a majority of countries will shift more than 6% quotas to under- represented countries.

World financial leaders have been striving to ease currency tensions stemming from global economic imbalances. Gold may fall in the coming week as the 'joint agreement' signals policymakers' determination to ease tensions. Yet, we doubt if the effectiveness of these efforts and remain bullish for the gold in the long-term.

Crude oil moved in a volatile range, showing little direction, last week with the WTI contract for December delivery ending the week -0.29% lower. Oil prices rebounded on Friday amid news that France is importing a large amount of fuel and using reserves to meet the market demand. We believe the impact of French labor action on US oil supplies would be small given ample stockpiles in the US.

Strikes, protests and demonstrations in France in opposition to a government bill to raise the age for a minimum pension from 60 to 62 have caused shutdowns of oil refineries and led to fuel shortages. According to French Energy Minister Jean-Louis Borloo, the country is importing 120K cubic meters of fuel a day and has 7M cubic meters of fuel reserves. Refinery disruption in France has raised concerns about oil supply to the US as France is the 4th largest gasoline exporter to Europe and a key exporter to the US. Indeed, the impact would be limited, as the US has ample fuel supplies, unless labor actions persist for a long period of time.

The US imported 12.602M bpd in July 2010, of which only +0.26% was from France. Considering Europe as a whole, the regions exported +16.7% of gasoil/diesel to the US in 2Q10 while exports of jet/kerosene were insignificant. Meanwhile, fuel stockpiles in the US remain ample with both gasoline and distillate inventories staying markedly above 5-year average. We believe the temporary disruption in France should not have much impact on the US market.

Tropical Storm Richard may be another support for oil prices. The US National Hurricane Center Tropical Storm said Richard gained strength and 'most of the intensity models respond to this by intensifying Richard into a hurricane'. Yet, meteorologists do not think it would threaten oil facility in the Gulf of Mexico. Therefore, any lift on prices will be short-lived.

Gas slumped as storage soared +93 bcf to 3683 bcf in the week ended October 15. Stocks were -48 bcf below the same period last year and +286 bcf, or +8.4%, above the 5-year average of 3397 bcf. Increase in gas storage has accelerated since mid-September, indicating a bearish outlook for demand/supply balance. Yet, demand may improve later in the year as price has plummeted to a level that should encourage using gas as a substitution for coal.

Gold contracted for the first time in 6 weeks as USD rebounded. The benchmark contract plummeted to 1315.6, the lowest level in more than 2 weeks, before settling at 1325.1, down -3.42%. The G-20 meeting over the weekend and the FOMC meeting in early November would be key catalysts for gold's outlook in coming weeks.

As we mentioned before, the long-term outlook for gold remains bullish despite near-term corrections as currency tensions, QE from central banks and sovereign crisis in peripheral European economies are factors supporting the uptrend.

The yellow metal has been rallying over the past several weeks as speculations for Fed's return to QE weakened the dollar. As the FOMC meeting approaches, the market began to worry that easing measures announced by policymakers may be less aggressive than the market has priced in. This was a reason for the dollar's rebound last week. In fact, we believe both situations - aggressive QE and mild QE- would be gold-positive.

If the Fed announces measures that exceed market expectations, the dollar will be under tremendous pressure. While weakness in USD benefits gold, capital inflows for gold as an inflation-hedge will also surge. If the central bank disappoints the market by beginning the QE will only a small amount, the dollar may rebound temporarily. However, investors will soon price in more downside risks for US' economic recovery and this should again spur gold purchase as a safe-haven asset.

Failure to test $25 led to a sharp fall in silver price. Over the week, the benchmark contract dived -4.82% and was the worst performer in the commodity sector. Yet, the decline was insignificant compared with the lucrative +36.5% rally since the beginning of the year.

Following gold's suit, silver surged amid speculations of Fed's QE. The 'poor people's gold' has stayed at elevated levels after making a new 30-year high last week. AT the same time, the gold /silver ratio has dropped to 56.13, the lowest level in more than 2 years, signaling silver's outperformance to gold. Investors to be cautious about a deep correction as it's uncertain how long investment demand can support silver's rally as growth in supply has been outpacing that of demand.

Although unexpected rate hike in China triggered profit-taking, recovery was seen later in the week as sentiment remained positive for the complex. Yet, due to divergence in fundamental outlook, price movements of individual metals differed.

Launch of physically - backed ETF on base metals has recently been a hot topic and impacts on the demand/supply outlook have been widely discussed. Aluminum will likely be the first industrial metal ETF in the market. We expect an ETF should help eliminate the huge aluminum stockpile and lend support to price.

That said, launch of physically-backed ETF is not without risk. For example, notional storage costs for the base metals are much higher than for precious metals. Moreover, the cost of storage built into a physically-backed ETF will make it underperform that of an index-linked ETF. As a physically-backed ETF increases demand and raises the price of a certain metal, higher metal price may induce substitution and eventually deteriorate the fundamental of that metal.

View the original article here

Gold Fields sees strong fundamentals for <b>gold price</b> | TechnoForum

Tuesday, October 12, 2010, 15:12Social Media

Gold Fields sees strong fundamentals for gold price
Gold Fields, the world’s fourth-largest listed gold miner, sees strong fundamentals for the sector, although rising electricity prices in South Africa and a strong rand were strong headwinds.

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