The mountain of negative yielding bonds currently $16 trillion and renewed Fed interest rate cutting cycle together with the chance for of renewed quantitative easing measures (QE) remain the key pillars of support for gold. Adding to this the increasingly unpredictable behavior of the US President as recession risks rise and the 2020 election gets closer as well as the trade war between the US and China and continued central bank buying.
Preliminary data for July shows that central banks led by Russia, China and Kazakhstan continued to increase official gold reserves. At its current pace the official sector buying is on track to exceed last year’s record 650 tons of buying.
In the short-term gold has run out of steam with profit taking emerging following a $265 rally since May. Higher bond yields, stocks and dollar this past week have all contributed to the first weekly drop in four thereby creating the first major challenge for investors currently holding an elevated “paper” long through futures and exchange-traded funds. However, given the size of speculative positions, especially the near record long held by funds in futures, the setback so far has been relatively small and points to continued support.
Platinum, supported by palladium, found a bid and once again tried to challenge the downtrend from 2011. The combination of profit taking in gold at a time where the speculative long is near a record and a much smaller net-long in platinum, below its five-year average, has supported a $45 reduction in the spread to $635.
Crude oil remains stuck with the relief rally in recent weeks not removing the fear that recession risks could still lead to another drop in the market. The price was supported by renewed US-China trade hopes and another weekly drop in US crude stocks. Not least at Cushing, the delivery hub for WTI crude oil futures, after improved pipeline capacity from the Permian Basin to refineries and export terminals on the U.S. Gulf Coast have resulted in crude oil flowing away from Cushing since June.
The reduction in stocks have supported WTI crude oil while Brent crude oil has struggled relatively given it is the preferred contract by macro funds looking for a hedge against recession. The prompt spread between the two contracts have dropped back to $4.5/b from above $10/b back in June due to these factors.
We maintain a neutral outlook for oil given the strength of the opposing forces currently at play. From a chart perspective, both contracts remain in a downtrend with WTI currently showing the best prospects of challenging resistance. The closest level to watch being $56.5/b, the 200-day moving average, followed by $57.8/b, the trendline from the April high.