Spot Gold - $1,186.05 // $3.20 // 0.27%
Investors have curbed the enthusiasm that they projected through the week's open. The S&P 500's meaningful rally to new highs has stalled and so has confidence that a new market-wide bull way is ramping up. This fact would seem to help gold along; but in fact, the commodity's divergence from straight-forward risk appetite trends renders Tuesday's stall in risk just as ineffectual as Monday's rally when it comes to price action for the precious metal. Instead, the asset has climbed for its fifth consecutive session (its best run since May). However, consistency doesn't necessarily translate into conviction. This series of advances does not make for a hearty trend; and the market could still form a lower high to keep with a trend that has developed since gold marked its record high in late June.
A disregard for prominent market forces doesn't mean gold is completely devoid of fundamental influence. Instead, the market is awaiting a clear signal on this particular asset's more important catalysts. Notably, sovereign default risk has dissipated significantly. The waves in Europe's financial markets seem to be fading; but this is more a reflection of shifting investor focus rather than reduced risk. The threat of another financial crisis in fact continues to increase as long as the pace of global economic activity eases and governments are forced to withdrawal stimulus. In the meantime, perennial gold bulls may find another reason to buy in the PBoC's (China's central bank) announcement that it would allow more foreign companies access to the Chinese gold market. Along with an effort to increase the import and export of the precious metal within the country, this may be construed as a sign that demand will increase going forward. Certainly this opens up the door to greater investment akin to the Western world's desire to diversify; but it remains to be seen whether this truly opens the door to new demand rather than an easier path to it. That being said, it could very easily bolster volatility.
Another interesting story Tuesday was the Gold Council's second quarter recap for the gold market. Within the summarization, one of the more interesting highlights was a net inflow of 274 tons into ETFs through the period (the biggest influx on record). That, along with a note that the SPDR Gold Shares fund (the world's largest backed by gold) surpassed the $50 billion mark, is a meaningful sign of investor influence on price action at this point.
As for the futures market, the active December futures contract (the September contract is already winding down) has seen turnover of 59,650 today compared to the peak of 177,767 volume back on July 28 (a little moved day). Open interest on this particular contract has also leveled off around 336,000. That being said, aggregate volume has dropped to a six-week low and open interest is at a three-month low.
Spot Silver - $18.45 // $0.09 // 0.49%
Follow the previous two sessions' incredible run, silver has finally found a day of rest. Though putting in for a fourth consecutive daily advance, the metal has seen a significant reduction in momentum. It seems the $18.50 level is once again presenting trouble for this speculative asset. For fundamental influence, the dollar's ongoing decline is offering further bullish support; but the lack of conviction in risk-sensitive assets like equities is draining the market of necessary drive.
Spot Gold Chart (Daily)
Crude Oil (LS NYMEX) - $82.10 // $0.76 // 0.93%
It isn't surprising that crude has rallied to a new three-month high and extended its run to a fourth session when we consider the precious commodity only yesterday cleared the closely watched $80 mark. However, speculative momentum cannot carry itself for long - especially when the precedence of technical congestion exists not far ahead. Comparing and contrasting Tuesday's performance to Monday's, the first thing we notice is that underlying risk appetite is no longer supporting oil's run. The benchmark US equity indexes have leveled off after overtaking their own technical ceilings and other many other common risk barometers have taken a similar path. That being said, the US dollar has notably extended its own decline to fresh lows. As the primary pricing instrument for the Nymex-based futures contract, this particular currency's performance has a considerable bearing on crude's price. In fact, when the standard US oil contract is priced in euros, the rally still exists; but its progress is far more restrained.
Without a speculative catalyst, oil's advance could be limited as the fundamental outlook for supply and demand has not developed in harmony with underlying price action. In fact, Tuesday's scheduled macro event risk curbs consumption expectations for the world's second largest energy user. According to the US Commerce Department, both income and spending were stagnant for Americans through the month of June. Accounting for nearly three quarters of the entire economy, the performance of this particular group is vital for the overall activity level and thereby energy demand. Further tipping the supply/demand scale was the data that reported an unexpected 1.2 percent drop in factory orders and further 2.6 percent drop in pending home sales for the same month. Overall, this points to a cooler pace of expansion for the economy - a consideration that is already largely expected and therefore doesn't have such a dramatic effect on oil prices. Off the docket, a forecast for Chinese oil consumption (now the largest importer of crude) further dampens forecasts. China's largest energy company, China National Petroleum Corp., projected the nation would use 8.9 million barrels of oil a day in the third quarter - up 9.5 percent from the prior year. The growth may seem the take away; but in fact, the second quarter saw a 15 percent increase while the first reported 22 percent. This is a moderating trend of expansion - another sign that conditions are leveling off.
For the future's cadre have throttled back on activity through Tuesday's session. The September NYMEX light sweet crude futures contract (with an August 20 expiration) is seeing volume and open interests plunge to lows not seen in months as market participants roll out to the next month. That being said, the October contract had turnover of 55,008 contracts Tuesday compared to the previous session's 83,313 volume encouraged by the $80 breakout. Another interesting point to make in the futures market is that the excess premium for the contract set to expire in two years over that of the active nearby (contango) is near its lowest level in three months at $5.17). This is usually a sign of diminishing uncertainty; but it can also be tied to a significant appreciation in the active nearby. Looking ahead to Wednesday, the DoE inventory report could help maintain a positive trajectory for a little longer if stockpiles drop by 1.65 million barrels as is currently expected by analysts.
Crude Futures Chart (Daily)
John Kicklighter is strategist with DailyFX.com.