Commodities Rally as Gold and Oil Post New Highs
Oil saw gains into the end of this week as commodities markets continue to price in the increased likelihood that manufacturing productivity will improve into the end of this year as various central banks around the globe propose stimulus measures to support this aspect of the world economy. These previous declines in manufacturing productivity have been well documented so far this year, as declines in economic figures have shown weakness in the Eurozone, US and China (and in emerging markets as a whole).
Earlier in the week, however, oil met with some heavy selling pressure as investors took profits into the upper $90s (per barrel). Going forward, expect commodity rallies to continue if we see commentary from Eurozone officials that is supportive of bailout programs for debt troubled countries (such as the latest bailout plans offered for Spain). Longer term, the trend for oil is clearly in the upward direction, with prices trading above the $100 level (per barrel) on September 14th. These rallies came off sharply at the beginning of the week, trading below $92 (per barrel) but the commodity managed to close Friday in the green with gains of more than $1 (per barrel). Into next week, markets will be looking for additional central bank commentary that is indicative of renewed stimulus measures, which any positive comments likely to bring the uptrend in oil back into focus.
Gold – One of September’s Star Performers
Perhaps more impressive, however, is the recent activity seen in gold prices, with the metal rising to new monthly highs just below $1,780 (per ounce). This is the highest level in six months, helping contribute to the 11 year sting of annual gains. Current levels, however, are still well below the all time high of $1,921.15 that was posted in September of 2011, so there is still scope for further runs higher.
Most of the positive sentiment in Gold comes as a result of central bank stimulus programs, but for different reasons relative to oil. Specifically, Gold tends to be used as a hedge against inflation and the latest proposals by the Federal Reserve are likely to increase US inflation levels and put selling pressure on the US Dollar. Since Gold is priced in US Dollars, this is a positive scenario for Gold (and bearish for the US Dollar). These latest rallies, however, will likely see some stalling, given the strength of the latest bull run.
Technical Perspective
Gold has been one of September’s star performers, with prices now coming into resistance at the 1790 area. Look for some sideways trading in this area but if we do see an upside break, it will likely generate significant follow through given the selling stop losses that are probably placed just above. If we do see pullbacks, the first buying zone comes in at 1755, followed by 1720. A downside break here would signal that a short term top is in place, and target a drift back to 1680.
