Gas prices in Europe rose to another record before retreating with supply concerns being somewhat offset by weaker sentiment in the broader energy market given the latest wave of Covid-19. In the US, gas prices headed for their biggest weekly loss following a bigger-than-expected weekly rise in stocks, but forecast for another incoming heatwave will likely limit the correction with tight winter supplies, just as in Europe, a risk that may continue to support prices ahead of winter.
In Europe, an unexplained reduction in flows from Russia combined with rising competition from Asia for LNG shipments has made it harder to refill already-depleted storage sites ahead of the coming winter. These developments have led to rising demand for coal, thereby forcing industrial users and utilities to buy more pollution permits, the price of which are already trading at record prices. All in all, these developments have led to surging electricity prices which eventually will be forced upon consumers, thereby adding to the already rising cost of everything.
Gold spent most of the week trying to recover from the price collapse that followed the stronger-than-expected US jobs report on August 6. The sell-off culminated during the early hours of the Asian session last Monday when the yellow metal, within a short period, tanked more than 70 dollars. Coming into August, sentiment was already hurt by gold’s inability to rally in response to the July slump in Treasury yields. A drop in yields that concluded just days before the slump when US 10-year inflation-adjusted yields hit a record low at -1.22%.
Having struggled to rally amid favorable yields, gold immediately turned lower at the first sign of higher yields and once key technical levels in the $1750 to $1765 area were taken out, the flood of sell stops during a very illiquid time of day took it briefly down to the March double bottom below $1680, where fresh bids from physical gold buyers in Asia emerged once again.
The short-term outlook remains challenged by the risk of yields and the dollar both moving higher ahead of the late August meeting of central bankers at Jackson Hole. The annual symposium which in the past has been used to send signals of changing policies or priorities to the market.
A weekly close above $1765 in gold would create a bullish candle on the chart and it may help send a supportive signal to a market still dizzy following the latest rollercoaster ride. However, in order to look for a recovery, silver needs to join in as well and, so far, it is struggling with the XAUXAG ratio trading above 75 ounces of gold to one ounce of silver, its highest level and silver’s weakest against gold since December.