Gold's Movement More Correlated to Oil than Euro


Commodities stage a rebound after the sharp selloff over the past 2 days. The bounce in oil prices appear to be more fragile with both WTI and Brent crude futures remain hovering around yesterday's closes after edging higher earlier in the day. Gold and silver prices prove to be resilient. The benchmark contract for gold climbed to 1460 after settling at 1453.6 while that the silver rose to 40.5 after ending the day barely above 40 yesterday.

The EIA, the IEA and OPEC released their latest forecasts on oil demand for 2011. Indeed, only modest changes were made from the prior month. On average, the 3 agencies projected oil demand will rise to 88.5M bpd in 2011, up +1.47M bpd, or +1.69%, from 87.03 this year. The EIA also unveiled that oil demand for 2012 will reach 89.76M bpd, down from March's forecast of 89.88M bpd.

Both the IEA and OPEC raised concerns about rising oil prices on global economic growth, hence, oil demand. The IEA stated that 'global oil demand growth has shown signs of slowing in recent months in the face of sharply higher prices' while OPEC said that high oil prices are 'likely to have a slightly negative impact on transport fuel demand worldwide'.

Another issue is the actual amount of output suspended since unrest in Libya. According to OPEC, it has cut output in the country by almost 80% from normal levels of 1.6M bps to around 0.25-0.3 M bpd, all of which is said to be consumed domestically. In March, the 11 OPEC members bearing quotas produced a total o 26.60M bpd, down -2.53% from February. The compliance level was thus increased to 58.3%. The estimate was similar to IEA's 60%.

The consensus view concerning the impact of Japan's disaster on oil prices appears that while oil demand is temporarily affect, the long-term outlook remain robust, especially because of reconstruction later in the year and fuel substitution from nuclear to crude burning.

Notwithstanding is low correlation with other assets, gold's movement is sometimes affected by currencies and other commodities. We believe the metal's decline over the past days was taking oil's cue. Since March 22, the correlation between gold and WTI crude oil has risen above 60%, compared with 20% between gold and euro. Indeed, gold is trading more in line with oil than with the euro since November 2010, as shown in the chart below.

On the dataflow, the US retail sales probably climbed +0.5% m/m in March, easing form +1% in the prior month. Excluding autos, sales grew +0.7%, same as February. The BOC will release the Monetary Policy Report ( MPR ) after keeping the policy rate unchanged at 1% yesterday. Policymakers acknowledged in the post- meeting statement that Canadian economy has been growing 'stronger' than expected, triggering an upgrade of 2011 GDP forecast to +2.9% from January's projection of +2.4%. The BOC expects that the economy will return to capacity in the middle of 2012, 6 months earlier than what was projected in January. Growth will, however, slow to +2.6% in 2012 (January: +2.8%) and then to +2.1% in 2013. With growth forecasts revised higher, the central bank will deliver slightly more hawkish tone in the MPR but stress that strong Canadian dollar is dampening growth. The market currently speculates the BOC will hike rates in July.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Commodities

Referenced Stocks: MPR

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