A Focus on Financial Stability Edges out Growth for Gold and Oil Direction

Trading for both gold and oil was tempered Monday in both price action and underlying market turnover. With fundamental trends expected to pick up sharply over the coming days, market participants are increasingly hesitant to drive new highs.

North American Commodity Update

Commodities - Energy

Crude Rally Cools but Doesn't Reverse on Mixed Fundamental Picture Monday

Crude Oil (LS Nymex) - $ 81.47 // - $ 0.1 1 // -0. 1 3 %

After three consecutive sessions of hard rallying, US-based oil was finally knocked off its pace Monday. After climbing over 7 percent in the three sessions through Friday's close, WTI crude marked a modest decline on otherwise lack volatility. This lack of activity more accurately matches the CBOE's crude-based volatility index which has trended deeper and deeper into multi-month lows since mid-August. A fundamental explanation to today's controlled price action is the aimless bearing from the capital markets' benchmarks as well as a mixed picture from the economic docket (along with a heavy round of event risk scheduled for release over the coming days).

Looking at risk appetite trends first, we are first drawn to the discouraging performance of US equities (a good marker for confidence trends). The S&P 500 was down as much as 1.3 percent through the opening half of Monday's trading session before turning to congestion through the rest of the day. That initial bearish run had a tangible impact on curbing a strong upswing that had developed in the European trading hours and was abruptly stalled upon the opening of the New York stock exchanges. Beyond the surface reasons for the capital markets posting a negative performance - disappointing economic data - the stock benchmark has held to congestion for the better part of two weeks now. The anchor on one market has proven itself to be a tether on others through its risk correlations. That being said, scheduled event risk would also have its implications for a supply-and-demand assessment of oil's value. Starting in the Asian session, the outlook was good and getting better. A non-manufacturing industry report from China showed the world's second largest economy was showing expansion in construction and consumer spending despite the country's efforts to curb lending. Closer to home for Nymex traders, the US data wasn't as encouraging. Factory orders for August dropped 0.5 percent even if the nondefense capital goods orders excluding aircraft (used as a proxy for future investment) rose 5.1 percent. As for the 4.3 percent increase in pending home sales for the same month, the market was tempered to tepid improvements in the housing sector with the existing and new home sales numbers which advanced from record lows.

From the futures market, we can see that the staid level of price action matches the actual turnover for the day. Volume on the November Nymex futures contract measured only 294,743 contracts - a stark contrast to the 595,514 in turnover this past Friday. At the same time, it is worth noting that the two-year contango (the difference between the crude futures contract with the nearest expiration and that of the two-year deferred) dropped to an August 16 th low of $6.85 while the gap between the US and UK contracts contracted to a three week low of $1.81 (with the US Nymex contract trading at a premium).

Crude Futures Chart ( 240 Minutes )

Chart generated using FXCM Strategy Trader

Commodities - Metals

Gold Little Moved Despite Abundance of News on Europe's Financial Health

Spot Gold - $1, 315.25 // - $ 3.85 // - 0. 29 %

A relatively staid day for the gold market would neither allow the precious metal to nudge a fresh record high nor set the scene for a meaningful reversal. Activity for this particular metal was just as 'quiet' as it was for crude, equities and currency markets. The significant contrast between gold and its counterparts is the consistent trend that underlies its drift these past two months. As usual, the fundamental drivers behind this market run much more profound than the flippant day-to-day shifts in risk appetite trends. However, some of the more newsworthy developments over the past 24 hours and expected through the rest of the week may cater directly to this underlying fundamental concern.

While the lack of direction on the S&P 500 was notable gold traders, it wasn't the primary concern. Even if the benchmark stock index were set in a meaningful trend, the metal would likely be running on its own track. Far more interesting to the traders in this market was the report of improved activity levels in China's non-manufacturing regions (particular consumer spending) as well as Chinese Premier Wen Jiabao's vow to invest in domestic consumption going forward. This is a structure effort that could stabilize the region's growth and thereby its contribution to the global economy going forward. Acting to put out a far more volatile fire for the global financial markets, the same official vowed to support Greece and Europe in general by holding onto it's the region's government bonds. This is one of the few players that can meaningfully stabilize a troubled region like the Eurozone. And, if the threat of a default and subsequent crisis in this region is removed, that significantly reduces the need for gold as an alternative asset. That being said, there are a few other reasons to keep capital tied up in the metal. For one, intervention in the FX market undermines the sense that traditional assets denominated in home currencies are reliable investment. Today, World Bank President Zoellick acknowledged tensions due to exchange manipulation; but he tried to play down the suggestion that is was a 'war.' Beyond that, the threat of increased government stimulus is another distorting factor that is keeping wealth funneling into the precious metal. Tonight, the Bank of Japan will decide whether they will increase their liquidity efforts or not.

For market activity, the drop in price action was facilitated in a meager 72,164 contract turnover in the active Comex gold futures contraction (compared to the 209,646 trades on Friday). That being said, aggregate open interest on the futures market held near its record high (at 613,000) while ETF holdings of the precious metal were just of their record highs (at 67.33 million ounces).

Spot Silver - $2 1.95 // - $0. 1 6 // -0.71 %

Silver's rally can't last forever. Eventually a correction is warranted, if not for fundamental need, then through speculative reconciliation. After posting a fresh 30-year high intraday, the metal was set into a reversal that would shave some of the progress that was made this past Friday. Both gold's stagnation and the drop in risk appetite measured in stocks would work to curb the commodity. For color, activity in the December futures contract measured 26,690 turnover (versus Friday's 69,244) while ETF holdings ticked down from their record high (now at 441.9 million ounces).

Spot Gold Chart ( Daily )

Chart generated using FXCM Strategy Trader

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Written by John Kicklighter , Strategist

To receive John's reports via email or to submit Questions or Comments abo ut an article; email jkicklighter @ dailyfx .com

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

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

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