By Barani Krishnan
Investing.com - The first week of the Biden administration brought mixed fortunes for commodities - mixed is about the best description for it, as gold and other precious metals gained for the first time since the Christmas week, while oil and most other energy markets dipped.
While directionally, the different asset classes seemed to go the right away - i.e. the White House’s aggressive push for more stimulus lifting gold and new Covid lockdowns in China weighing on oil - the percentages on the weekly moves were modest, even puny, considering what was at stake.
For starters, consider President Joe Biden’s spending bill for the pandemic that starts at $1.9 trillion.
This isn’t something to be treated with nonchalance, given that the U.S. federal budget deficit itself is already at $4.5 trillion or so, after adding the Trump administration’s $3 trillion plus COVID-19 stimulus for last year. The national debt is, meanwhile, approaching $28 trillion, and total debt-to-GDP is at a stunning 146%.
And Biden has repeatedly said the $1.9 trillion is just a beginning. By the time, his administration is done fighting the pandemic, the federal deficit could be double-digits. One can only imagine the dollar debasement that will cause.
That’s not all. Monetary expansion is coming too. While the United States appears to be in the relatively early stages of a monetary expansion cycle, the so-called M2 monetary base could still increase substantially and set the country up for a return to the 2008/2009 financial crisis days.
With the dilution of the fiat monetary system, higher inflation is most certainly on the way. Gold prices have a very strong correlation on a long-term basis with monetary base expansion.
Yet, bears were allowed to attack gold prices in the final week of December - and, again, in the first week of this year - with such ferocity that belied any rational thinking, considering that the yellow metal has been a time-honored hedge against any dollar weakness or inflation.
The blame for gold’s tumble in that period was laid squarely on surging U.S. bond yields, namely that of the benchmark 10-year Treasury note. The argument was that the bond market feared near-zero interest rates will suddenly spike if the trillions of dollars of stimulus put to work end up boosting the economy faster than thought. The notion persists despite vehement counter-arguments from the Federal Reserve.
What really took the cake though was institutions diverting money from gold into bitcoin, which had suddenly taken on a Tesla-like mania in recent weeks amid the FOMO - Fear Of Missing Out - rally. Some of that lunacy was doused in the past two weeks as bitcoin lost 20% from record highs above $40,000. The craze over cryptos will probably return since foolery and markets can never be separated forever.
While many may be missing it, the hedge that gold provides in times of trouble, both economic and political, is real. True, gold is non-yielding, unlike bonds. But it’s a solid insurance against currency debasement.
Gold gained 1.4% in the just-ended week. That was less half than of the 3.5% it lost in the prior two weeks. At Friday’s close of just above $1,856 an ounce, it remains more than $100 below January’s peak and more than $230 under August record highs.
Bond yields aside, the other thing weighing on gold is concern that Biden may have trouble getting some of his stimulus packages through the Senate, given the razor-thin majority of one held by Democrats aligned with him.
The compromise then would be a string of mid-sized relief bills, rather than chunky trillion-dollar instalments. That could mean a slower climb for gold prices rather than a runaway rally many had thought earlier.
On the oil patch, crude prices fell the most in five days after the first U.S. crude build since the week ended Dec. 7 reported by the U.S. government. It was a build that corresponded with the lack of retail commercial demand for fuel amid the coronavirus pandemic.
Despite the drop on Friday, crude prices barely fell on the week, resisting any sharp move to the downside on the notion that OPEC production cuts in February and March led by the Saudis will shore up the market.
What traders ignore is China’s ramp up in lockdowns after the highest number of daily Covid-19 cases there in more than 10 months. The other thing that might soon bite the market in the rear are production ramp-ups by Iran, now that Trump-era sanctions are not expected to be enforced rigidly anymore.
Gold Price & Market Roundup
Gold for February delivery on New York’s Comex did a final trade of $1,855.30 on Friday, after officially settling the session at $1,856.20 an ounce — up $9.70, or 0.5% on the day.
For the week, the benchmark gold futures contract was up $26.30, or 1.4%. In the prior two weeks, February gold lost nearly 3.5% combined.
“I think gold is building up energy and likely to make a solid move in the near to intermediate future,” said Eric Scoles, market strategist at Blueline Futures in Chicago. Which direction, he’s unsure.
And this is Scoles’ problem, as well as that of many analysts.
Scoles points to gold’s hourly chart that showed a mostly range-bound move between $1,826 and $1,827 since Jan 8. This suggests a market in consolidation before a bigger next move, he said.
“In my opinion, the daily chart and the monthly chart both look a bit bearish,” he adds. “There is however a notable bullish signal on the weekly chart showing a positive reversal. But I'm somewhat bearish until there is a more significant shift in fundamentals.”
Ed Moya, senior analyst at OANDA in New York, concurs with that view.
“Bets against the greenback remain excessive and the dollar rebound might need to continue before dollar weakness can resume,” says Moya. “Gold appears set to consolidate, but the longer-term bullish outlook should remain intact on ballooning deficits and as inflationary pressures heat up.”
Oil Price & Market Roundup
New York-traded West Texas Intermediate, the key indicator for U.S. crude, did a final trade of $51.99 per barrel, after settling Friday’s official session down 86 cents, or 1.6.%, at $52.27 per barrel. It was WTI’s biggest one-day slide since Dec. 18.
But for the week, WTI lost just 0.2%.
London-traded Brent, the global benchmark for crude, did a final trade of $55.08 per barrel. It settled Friday’s official trade at $55.41, down 69 cents, or 1.2%, on the day.
For the week, however, Brent gained 31 cents, or 0.6%.
On the crude inventory front, the Energy Information Administration reported a build of 4.35 million barrels for the week ended Jan. 15. It was the first stockpile increase for U.S. crude since the week to Dec. 7 and bucked market expectations for a draw of 1.17 million barrels.
Contributing to the crude build here is a huge slump in U.S. crude exports, which fell by nearly 750,000 bpd, or barrels per day. But to offset some of the slack in exports, the United States also took in less imports last week, to the measure of 194,000 bpd, the EIA data showed.
On the fuel products front, gasoline registered a draw of just over a quarter million barrels versus an expected build of 2.8 million. That came after a total build of 9 million barrels over the previous two weeks.
For diesel-led distillates, the build was less than half a million barrels versus expectations of a rise of 1.2 million. Distillate inventories have risen 14.5 million barrels over four weeks now.
Besides the U.S., the outlook for oil was getting worrying on the international front as well.
Since last week, China has started restricting the movement of some 28 million people after suffering its first coronavirus death on the mainland since May.
In Iran, officials reported on Friday that they were ramping up production with the end of tight policing done on the regime by the previous Trump administration’s sanctions.
Iran once sent out more than 3 million barrels per day around the world, and although its crude shipments were at a fraction of that now, it could regain its export momentum for oil very quickly. It is something to be watched carefully, given the impact Tehran could have on the stage-managed output of the global oil alliance OPEC+, and the broader impact on oil prices.
Energy Calendar Ahead
Monday, Jan 25
Private Cushing stockpile estimates
Tuesday, Jan 26
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Jan 27
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Jan 28
EIA weekly report on natural gas storage
Friday, Jan 29
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.