Gold suffered the biggest monthly drop in four and half years in June in response to the changed tone from the Federal Reserve with regard to its willingness to control inflation through higher rates. While real yields have traded quietly around pre-FOMC levels, it was the stronger dollar that helped trigger the June correction, but as July began gold managed to find a bid despite continued dollar strength. Possibly a reflection of a market where traders had by now adjusted their positions to reflect a more hawkish Federal Reserve, but also a market seeing inflationary pressures through the rising cost of energy, both oil and natural gas. So far, however, the bounce has been relatively shallow with a break above $1795 and more importantly $1815 needed to change the sentiment back to neutral from negative.
Crude oil rose ahead of the monthly OPEC+ meeting in response to a price-supportive proposal from Russia and Saudi Arabia to increase production by 0.4 million barrels per day from August to December, while extending its supply management policy from April 2022 to the end 2022. An increase of this magnitude was less than the market had anticipated and if agreed would keep global markets artificially tight and ensure further price support over the coming months.
However, while supporting the increase, the UAE, which has raised its production capacity since 2018 when the individual baselines were set, insisted on having its baseline lifted by 0.6 million bpd to 3.8 million bpd, thereby allowing them a unilateral production increase within the current quota framework. Especially the extension of the current arrangement to the end 2022 was a problem as it would leave 30% of the country’s capacity idle for longer than expected. WTI crude oil almost jumped 4% on the news of a smaller-than-expected increase before paring gains on the UAE objection. However, judging from the price action, the market believes a price-supportive deal will be struck when the group resumes their meeting Friday afternoon Vienna time.