The precious metal complex got hammered last week. The main
reason is probably the Fed's more hawkish policy statement
delivered after the March FOMC meeting. Policymakers acknowledged
improvement in economic conditions as "unemployment rate has
declined notably in recent months". Gold declined -3.24% and
settled at 1655.5 last week while silver plunged -4.69% to end
the week at 32.57. Crude oil prices remained range-bounded most
time of the week, only showed more volatility later in the week
after an unverified report saying that the UK and the US would
released strategic petroleum reserve. The news was later denied
by both the UK and the US. Yet, speculations could remain intense
as the US Energy Secretary Steven Chu and Treasury Secretary
Timothy Geithner have stated recently that a release is under
consideration of the government in order to bring down high oil
prices Crude oil prices slipped with the front-month WTI and
Brent crude contracts losing -0.32% and -0.13% respectively.
Concerns over oil supply disruption have been a main feature
in the oil market since last year. The civil war in Libya
triggered the IEA's June announcement of the coordinated release
of 2M bpd over 30 days onto the world market. Yet, the IEA
executive director said earlier this week that there's no need
for the release of SPR for now.
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If we take a closer look at the demand/supply balance, we
would discover that the supply side problem is probably more
serious than last year. Although production in Libya has been
recovering, other oil producing countries (e.g. Iran, Syria,
Sudan and Yemen) are under threat of output disruption.
Meanwhile, the market is also facing the threat of a disruption
to the Strait of Hormuz, despite a low probability.
While Saudi Arabia has pledged to take the lost Iranian oil,
the latest IEA data indicated that Saudi's spare capacity levels
have fallen below 2M bpd as of February for the first time since
4Q08. This suggests that there's less buffer for Saudi to act as
a substitute.
Should there be a SPR release, price actions of crude oil and
gasoline are expected to fall as learnt from the experience last
year. Following the SPR release in June last year, retail
gasoline and WTI crude oil prices dropped -9% and -12%
respectively in the subsequent 3 months.
The DOE/EIA reported that gas inventory dropped -64 bcf to 2
369 bcf in the week ended March 9. Stocks were +735 bcf above the
same period last year and +807 bcf, or +51.7%, above the 5-year
average of 1 562 bcf. Separately, Baker Hughes reported that the
number of gas rigs fell -7 units to 663 in the week ended March
15. Oil rigs soared +21 units to 1 317 and miscellaneous rigs
dipped -3 unit to 4, sending the total number of rigs to 1 984
units. Directionally oriented combined oil, gas, and
miscellaneous rigs climbed +16 units to 228 while horizontal rigs
increased +16 units to 1 180 and vertical rigs fell -21 units to
576 during the week.
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Gold dropped last week as mainly driven by the dissipated
speculations of QE3. Indeed, since the middle of last year, gold
have been moving within a broad range between 1600 -1850. During
the period, gold 's rally has been driven by anticipation of
further central bank monetary easing, especially QE3 by the Fed,
while the decline has been due to fading of such hopes.
The yellow metal has declined almost -15% from the peak of
1923.7 made in September. Whether gold's long-term uptrend has
ended is a controversial topic but strength of official demand
continues. Central bank purchases, mainly from emerging
economies, were robust last week. According to Financial Times,
the Bank for International Settlements bought significant
quantities of gold on the international market amid falling price
on behalf of central banks. The new reports stated that the BIS
bought 4-6 tonnes of gold, worth roughly $250m-$300m at current
prices, in the over-the-counter physical market last week.
Although the market appeared to be pricing out the chance of
further QE3, we remained hopeful that the Fed would maintain its
monetary policy as accommodative as possible with the next move
in the second half of the year. in the meantime, we continue to
believe that zero interest rates in the US and negative real
rates remain supportive for the precious metal.