It’s been an interesting week in the commodities markets. Gold’s dramatic plunge from a record peak of above $1,200 an ounce has had investors wondering whether the top is in, or whether it’s now time to buy before the next bull run ensues. Meanwhile, natural gas, one of the worst-performing commodities this year, has been shocked to life amid a North American cold snap.
Better-than-expected employment reports in both the U.S. and Canada have influenced trade in early December, along with central bank actions across the globe to maintain the low-interest rate environment. This has created volatility in a variety of markets, but also, some great opportunities. Let’s take a look at metals first, and the market everyone is talking about—gold.
Metals
In my opinion, gold was overdue for a correction. February COMEX gold futures fell under $1,130 an ounce by Tuesday, December 8, after hitting a record of $1,227.50 on December 3. The market posted the sharpest three-day drop since October, 2008. Now the question on everyone’s mind is whether this correction is a buying opportunity, or whether gold is going to sink back to $1,000 or even lower. In my opinion, I don’t think gold has yet seen the top, and this correction should be over in a week or two.
There seem to be two camps of investors in this market right now. The first is those who have owned gold from $1,000 or lower. Some of these traders took profits and got out of some positions near $1,200, but most are maintaining them with expectations of much higher prices in 2010, maybe to $1,300 or $1,400. These traders don’t seem ready to abandon ship. These people still feel comfortable buying at these levels to add to their position.
The other camp of investors is those who came in late, and bought gold as it moved above $1,100. They are the ones getting hurt and getting out quickly. A break below $1,140 caused a dramatic drop, and that tells me there were a lot of stops near there that got hit.
I maintain that this pullback is an opportunity to get in this market if you aren’t already. I have heard some analysts say they expect gold to fall further to $1,000, but my opinion is that these dips are buying opportunities. We know how the market reacted to the Indian central bank’s $6.7 billion purchase of gold. If China were to move even 2 percent of its reserves into gold, it would have a huge impact on price action. We are moving from an era when central banks didn’t want to hold gold, to one where they do, particularly the emerging markets. This is also the first time in history when we are seeing nearly all central banks in the world printing money, embarking on huge stimulus packages. You can’t print wealth, and we are going to see the consequences of these actions down the road.
Gold is one of those markets that tend to see frenzy among investors; they have to buy it now. They can’t open their accounts fast enough. Interestingly, I haven’t witnessed that type of frenzy just yet—which all leads me to believe the top probably isn’t in.
Silver, platinum and palladium are experiencing similar corrections, although not as pronounced as gold’s. We aren’t seeing that same level of positions being abandoned in these markets. Platinum and palladium are still well below their all-time highs hit in 2008, and the metals are good alternatives to diversify out of gold if you are nervous about gold’s prospects. Platinum and palladium have industrial uses, including catalytic converters in cars, which are key to reducing polluting emissions. I expect continued strength in these markets, as there is some stability tied to industrial demand.
Energy
We are finally seeing natural gas recover after some difficult times for market bulls. This market was trading at its lowest levels since 2002. January NYMEX natural gas futures rose three sessions in a row, to above $5 per MMBtu. It seems as though the first winter cold snap across North America came as almost a surprise, and the market is reacting quite aggressively. I think it’s safe to say we will have more cold weather in coming months. This could be the first week we see a draw in storage levels reflected in the U.S. Department of Energy’s storage report on Thursday, December 10. A draw was expected in the prior weekly report, and it didn’t materialize.
Crude oil has finally started to lose momentum, although it’s a difficult market to short. Speculative traders have a lot of influence on crude oil. For months I felt crude oil was overpriced at near $80 a barrel, as the economic fundamentals didn’t justify price action. My clients in the trucking industry weren’t seeing increased demand for fuel at all this year; it has been the opposite. They have had trouble finding things to move around during the recession. I maintain that this year’s strength in crude oil has been driven largely by speculation. However, fundamentals will prevail in the end. If you aren’t overly conservative, a long natural gas and short crude oil trade might be worth considering right now. Global economic strengthening is needed to really boost crude oil.
Canadian Dollar
I think it’s clear this market is getting into a range trade until the end of the year, and Canadian dollar futures should trade between 0.93 – 0.98. The last time the Canadian dollar moved to $0.98, the governor of the Bank of Canada started talking about intervention to weaken the currency. His bluff was enough. It’s not difficult to find traders willing to buy around $0.93 – $0.94, which should act as support. On Friday, December 4, we had a fantastic November employment report in Canada. Statistics Canada said 39,000 full-time and 40,000 part-time jobs were created. Most of the gains came from women aged 25 – 54, and men 55 and older.
What that tells me is that there were people who possibly weren’t working by choice, but due to financial constraints, were forced to seek employment. These figures likely included some stay-at-home moms and men over the age of 55 who might have been retired, but needed to go back to work to make ends meet. I speculate this might be going on because it takes a while for those types of decisions to be made. People don’t do that unless they have had a few months of stress and strain. This uptick in employment might be overly optimistic, but by any measure, it’s a good sign.
On Tuesday, December 8, the Bank of Canada decided to leave its key short-term interest rate unchanged at 0.25 percent, which was not a surprise. However, their tone remained dovish, and the comments were little changed from the last meeting. The central bank said it would keep rates near zero until the end of June 2010, and repeated concerns about a too-strong Canadian dollar acting as a drag on growth.
The Consumer Price Index (a measure of inflation at the consumer level) hasn’t yet moved up enough to justify raising interest rates, but over time, the liquidity that has been injected into the system over the past year will likely change that. Inflation will return. While it looks like we’ll have low rates until spring, at some point, there could be an abrupt and rapid increase.
Even though it’s been a stressful week with some markets coming off their highs, in my opinion, it’s been a good week to capture opportunities. Please feel free to call me with any questions you might have about the markets.
Aaron Fennell is a Senior Market Strategist based in Toronto, and is serving clients in Canada. He can be reached at 877-840-5333 or via email at afennell@lind-waldock.com. You can follow Aaron on Twitter at www.twitter.com/AFennell.
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