The unexpected gains metals like Gold and Silver recorded towards the latter end of last week were erased yesterday, and then some. Gold extended to a near six-week low at $1203 while Silver declined by just over $1 to its own five-week low at $16.28. The bearish momentum was probably in preparation for the FOMC minutes release this evening with the minutes likely to repeat the central bank’s commitment to begin raising US interest rates this year, which was likely to pressure commodities. There might be hesitation from the Federal Reserve to raise US interest rates as early as the USD bulls would like, but the monetary policy makers are still on course to raise rates this year and this is largely why any USD softness appears to have a short-term nature.
As repeatedly mentioned, what traders are doing more frequently is taking some profit on the USD and then purchasing the currency in dips. Traders are doing this because they have become increasingly aware that after so many months of repeated speculation and heavy optimism, the Federal Reserve will remain in no hurry to raise interest rates. The volatility noticed in metals might not be over yet, because any unexpected hawkish comment from the FOMC this evening that it could begin raising interest rates sooner would likely inspire USD demand and as a consequence, spell bad news for metals. On the other hand, an unsettling comment from the FOMC that it is beginning to watch international developments more closely could lead to suspicions the Federal Reserve will sit back and possibly lead to a recovery of losses for metals.
Although the change of investor sentiment towards metals might have changed yesterday, demand for WTI and Brent Crude Oil is not yet showing signs of concluding. There is no doubting that investor sentiment towards the commodity has changed over the previous couple of weeks. While it is conceivable to admit that after losing over 50% of its value within six months or so meant the commodity was oversold, recovering around 20% is still some accomplishment – especially considering the economic conditions for the commodity haven’t changed in the slightest. By that I mean the aggressive over-supply is still in the markets, and increased inventories from the United States and output from elsewhere as well basically means it is growing.
Due the aggressive over-supply and global economic uncertainty still being in the air, I remain cautious that the commodity will at times be at risk of a sudden pullback. I will closely be watching the tone delivered from the FOMC minutes tonight because WTI and Brent Crude are priced in USD after all, therefore there could be some movement in the oil markets. I will also be closely monitoring the latest US crude inventories report this Thursday. Further evidence of US inventories continuing its rampage could also provide another reminder that the over-supply issue is not going anywhere anytime soon – which could also spell out a potential downside risk for the commodity.
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