declining inventories.
Essential economic data continues to support the current economic
recovery while global headline inflation rose again during January
highlighting the risk of rising food and energy prices. The ongoing
geopolitical tensions in the MENA region (Middle East and North
Africa) is not far from the headlines either with hoarding of
essential food commodities continuing to be a theme that drives the
agricultural sector. Hawkish comments from the European Central Bank
about fighting inflation helped the dollar weakens against the Euro.
*Modest overall gains for the week *
The Reuters Jeffries CRB index is showing a tiny weekly increase with
mixed performances across the different sectors. Out in front as usual
is the soft sector with cotton and coffee being the strong drivers.
All four precious metals have rallied strongly with silver and gold
recovering from the ahead of schedule 2011 sell off while platinum and
palladium continuing their strong performance on the back of strong
demand from the vehicle industry.
*Gold outperformed by silver*
Gold continued the rally that started in late January following the
breakout of civil unrest in North Africa. Robust physical demand has
off set the modest liquidation in gold ETFs with total holdings only
dropping by 4.5 percent since the December peak. Silver but has been
the star performer over the past few weeks having outperformed gold by
12 percent since the unrest in North Africa started. Investors are
buying silver coins at a speed that is draining supplies with issuers
having to ration sales.
As inflation continues to pick up one of the key questions in the
months ahead will be whether central banks from developed nations will
be able or prepared to apply the economic brakes soon enough. The
market is pricing in the first rate hikes in Europe, UK and the USA to
happen during the following half of 2011. Whether that will be
possible given the continued fragile state of some countries is the
huge inquiry. If the market becomes concerned about central banks
diminishing behind in their fight against inflation it could provide
precious metals with the ammunition to go even higher.
Gold having broken above 1,370 during the week has now set its sight
on 1,400 before the triple top between 1,424 and 1,430 comes into
play. Silver meanwhile broke the December highs and have go to a 30
year high just below 32 dollar per ounce. A year ago 1 ounce of gold
would set you back 70 ounce of silver, that ratio has now dropped as
low as 43.50, the lowest level in 13 years.
*Dread of supply disruptions drives energy*
Global demand for energy continues to support the price of Brent crude
above USD 100 while the distortion in WTI crude stemming from the
Cushing bottleneck has left it drifting below USD 90. Unrest in the
MENA region, healthful demand from Asia combined with an increased
demand for distillate products like diesel have kept prices supported
and these should continue to be the main drivers near term.
Escalating protests in Bahrain and Libya has fueled concern that
supplies from oil producing nations could potentially be disrupted.
This would add a new and perilous dimension to the present global
supply and demand circumstances, also taking into account that OPEC
holds most of the surplus spare capacity
The speculative long spot in WTI crude remains elevated near
confirmation highs and continuing dislocation from other global
benchmarks could trigger some long liquidation thereby widening the
spread even further. On that basis we do not recommend anyone to trade
the spread between WTI and Brent as the relation between the two has
broken down completely.
*Cotton breaks two dollar per pound*
The extreme volatility in cotton continues with the price this week
success the surprising level of two dollars per pound for the first
time ever. Tight supplies combined with strong global pickup in demand
have left the price nowhere to go but higher as cotton mills scramble
to secure supplies. Global production is expected to increase in 2011
as producers react to the price rises by planting more. This should
help rebuild global inventories in the months ahead and is also
reflected in forward prices with the price for December delivery
trading 70 cents below spot.
*Profit taking in grains*
After success new highs last week soybeans, wheat and rice ran into
profit taking this week as high prices saw a reduction in export
demand. Soybean production from Brazil, the world's following
largest exporter look set to beat last year's confirmation as better
than expected rainfall has improved conditions. Wheat prices should
stay supported amid the civil unrest and drought in the northern wheat
areas of Plates which is threatening the winter crop.
*What are forward prices telltale us?*
Passive investments in ETFs or commodity index funds such as GSCI and
DJ-UBS often do not bring the return that investors would expect. This
is due to price differences between the reported spot month
performance and the forward prices. The above investments types are
often invested in the spot month futures contract and have to roll
into the following months ahead of expiry. This exposes them to the
slope of the forward curve, if the forward price is lower they will
obtain a positive roll yield and vice versa if the curve is positive
sloping.
The chart below shows the price difference between spot and one year
forward. Most of the soft commodities which have performed strongly
during the last six month have a positive roll yield as the forward
price trades below spot. This is primarily due to the tight supply
circumstances which has left spot prices at elevated levels. At the
other end WTI crude and natural gas both have forward prices trading
at higher levels which could erode some of the potential gains from
holding long futures positions.
Source: Fxstreet.com
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