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The Overall Fundamentals
Commodities rebounded last week as the nuclear crisis in Japan
eased. The fighting in Libya continues, and I believe that the
market has priced in a period of political and economic
disruption in the MENA region with significant amount of oil and
energy capacity suspended for some time to come.
In my talks with players they are focusing on macro-economic
events. Data released last week in the USA were mixed, though we
saw a drop in home sales, the market liked that the Country's job
market has been improving, durable goods orders disappointed a
bit, and falls in both existing home sales and new home sales
data indicated consumer spending remains dampened.
In the EuroZone, concerns about sovereign and debt problems in
the European periphery re-emerged. Portugal's PM resigned after
the Parliament rejected his fiscal-consolidation plan, raising
bets of Portugal's request for a rescue from the EFSF.
Concerns about the stability of the banking and financial
systems in the EU peripheral countries heightened by rating
agencies' downgrades. Fitch Ratings and S&P downgraded
Portugal's credit ratings to A- from A+ and BBB from A-
respectively while Moody's cut senior debt and deposit ratings of
30 smaller banks in Spain as the agency doubted government's
support to the lenders.
The EU Summit held on March 24-25 note what most expected,
i.e. the capital structure and interest rates for the new ESM
have been confirmed. The ESM will have a total subscribed capital
of EUR700B, of which EUR80B will be in the form of paid-up
capital provided by Eurozone member states being phased in from
July 2013 in 5 equal annual installments. Details on the new EFSF
will not be finalized until June. No new updates were provided
regarding financial assistance for Ireland or Portugal.
As we know from our experience, Gold benefits as sovereign
crisis in the Eurozone heightens, and we here at Live Trading
News believe part of the Gold-buying last week reflected those
concerns. But, strength in the precious Yellow metal was, for the
most part, driven by geo-political tensions in the MENA region
and uncertainty about the impacts on Japan from the recent
Despite the rise to a new record price mark, Gold reversed
some, and finished the week +0.72% higher.
Profit-taking is the big reason for the price action, but the
"Hawkish" comments from ECB members offset some upward pressures
The ECB may move to increase interest rates in April. If its
tightening measures are aggressive enough to generate a move in
short-term real rates, Gold may see some negativity on the
Gold and Silver
The precious metals complex rally was broad based but Gold
apparently under performed Silver and PGMs although it hit a new
all-time high of 1448.6 oz Thursday.
After ending Y 2010 on a Strong note, Gold's price has under
performed from the beginning of this year as improvement in risk
appetite drove investors to stock markets.
The precious Yellow metal gathered up momentum again in late
January and has remained Strong since then.
Though geo-political tensions in the MENA region have
bolstered Gold recently, expectations that inflation in the USA
is bottoming have been supporting the metal's price action
The US Fed IMO, thought it is pledged to pay close attention
to the evolution of inflation and inflation expectations, has no
intention to alter its accommodative monetary stance because it
believes that the recent upward pressures from commodities is
Negative real interest rates encourage Gold purchases as
players look to diversify their cash holdings.
Negative real rates are not only seen in the USD but also the
GBP, and EUR.
With the ECB talking about starting to increase interest
rates, Gold may be forced down. But, we believe that the impact
may not as big as some fear if the Euro is boosted by widening in
USD-EUR yield differentials.
Silver was the best performer in the complex with the
benchmark contract jumping to a fresh 31 yr high at 38.18 oz
Thursday, before settling at 37.05, +5.70%.
Silver's price outlook is volatile because the fundamentals
are somewhat weak.
PGMs rebounded after falling during the past 2 weeks. The
outlook there is based largely on the auto sector and its
response to Japan's recovery.
Industry experts that I have read now estimate Global
automakers may lose production of about 600K vehicles by the end
of this month, as it is believed that it make take several months
before inventories and other parts of the industry are back to
normal in Japan.
Crude Oil rallied last week with WTI Crude Oil prices for
delivery in May gaining +3.49%, and equivalent Brent Crude prices
marked a +1.46% on the week. Consolidation of Brent Crude prices
helped narrow the WTI-Brent spread.
WTI Crude Oil rallied with prices approaching its 28 month
high of 106.95 Thursday. The strength was driven by Strong Oil
demand in China and the USA. I believe that now the relations are
strained between the USA and its most important Arab ally, Saudi
Arabia, and that also worked to boost Crude Oil prices.
It was reported that in a telephone conversation with Saudi's
King Abdullah, US President Barack Obama asked for 'political
process as the only way to peacefully address the legitimate
grievances of Bahrainis and to lead to a Bahrain that is stable,
just, more unified and responsive to its people'.
Previously Saudi ignored the USA's request and sent troops
into Bahrain and the King remained angry with USA's abandonment
of President Hosni Mubarak during the Egyptian protests.
Saudi Arabia is a major Crude Oil supplier to the USA, and
according to the DOE/EIA, the Kingdom exported an average of 1M
bpd of petroleum liquids to the US, accounting for 9% of total US
petroleum imports, in Y 2009.
During that period, Saudi Arabia ranked 4th after Canada,
Mexico, and Venezuela as a petroleum exporter to the USA. If
US-Saudi relations deteriorates more, it is possible that the
Kingdom's motivation to calm markets by raising production will