How can the Bank of Japan Spark a Rally in Gold and Crude?

North American Commodity Update

Commodities - Energy

A Rally in Risk Appetite Trends and Tumble for the Dollar Translates into Gains for Oil

Crude Oil (LS Nymex) - $82.82 // $1.35 // 1.66%

Last week’s bullish drive behind oil was revived through Tuesday’s session as the capital markets showed the evidence of a revived taste for risk appetite. And, despite the fact that this swell in demand for speculative assets was derived through government intervention and manipulation, traders will ultimately go with the flow. For performance, the previous day’s session offered a notable 1.7 percent rally that would mark a fresh seven-month high on both an intraday and close basis (through not by a significant margin on both accounts). The fact that the market has yet to definitively surpass August’s swing high is a hurdle that maintained optimism / speculative demand will have to surpass. Though, considering that four of the past five active trading sessions have seen advances greater than 1.5 percent suggests momentum is on the bulls’ side.

For drive Tuesday, the energy market would find some support through macro sources; but the real momentum was derived through speculative endeavors. Risk appetite was stoked very early in the session when the Bank of Japan announced that it was opening the tap on monetary policy with an effective rate cut and the adoption of a stimulus program that is very similar to the Bank of England’s bond purchasing program and what many are expecting the Federal Reserve will adopt in the near future. In turn, this expansion by the Japanese policy officials boosts confidence that the US and UK (perhaps even the European) groups will reciprocate with additional measures of their own. What does this actually mean for energy traders? Does this necessarily secure a stronger pace of growth? Not necessarily. Many feel additional support will jump start growth; but previous injections of stimulus seem to have fallen short of the market. It must be remembered that this support will eventually be withdrawn and such temporary measures will not likely reach far enough to correct entrenched unemployment or jump start meaningful earnings / yields. In the meantime, the supply-and-demand balance was tipped modestly by an improvement in both US and UK service sector reports. The being said, the durability of this progress is question with new orders for the UK dropping and business activity in the US slowing. Furthermore, the API inventory figures for the week through October 1st reported a 4.44 million increase in crude holdings. Perhaps the forecast for a 413,000-barrel increase in the Department of Energy counterpart is a low-ball figure.

Looking at the backdrop for trading activity, the surge in the underlying and five-month high came through a slight uptick in volume for the November Nymex futures contract from yesterday’s directionless session (314,418 contracts). Also of interest, this rally is significantly reducing the two-year contango for the oil market which is now at a seven-week low $6.76.

Crude Futures Chart (240 Minutes)

                                                        Chart generated using FXCM Strategy Trader

Commodities - Metals

Gold and Silver Surge as Investors Abandon Currencies, Traditional Assets in the Wake of Stimulus Injection

Spot Gold - $1,340.65 // $25.40 // 1.93%

If we needed a clear example that gold was not merely a traditional safe haven currency for capital flows, we would certainly see evidence of this principle in Tuesday’s price action. At the same time that the S&P 500 and crude rallied, the precious metal produced a remarkable 1.9 percent advance. This was the biggest daily advance since May 11th. What makes this performance even more remarkable is the fact that such a strong surge has taken place after weeks of consistent rally and subsequently from record highs. To stage such an extraordinary rally at levels that speculators do not have a clear sense of where the next level of equilibrium can be fairly gauged requires an elemental fundamental driver – in this case stimulus.

The Bank of Japan’s decision to lower its benchmark rate to a range between 0.00 and 0.10 percent was wholly unexpected. The reason why such a move was unexpected was that it is general considered an unproductive alteration. However, this reduction seems to be more symbolic than economical. Aside from altering the benchmark lending rate to a range above zero, the policy group introduced a new 5 trillion yen stimulus program that was aimed at reducing long-term borrowing costs and curbing premiums on corporate debt; which is an additional to the 30 trillion yen in the existing lending facility. Altogether, this is a statement that the central bank is willing to do whatever is necessary to support growth and fight deflation. What does this mean to global investors? Well, in the context that we have seen suggestions for extremely loose policy from both the Federal Reserve and Bank of England; there is a growing sense that normal market fluctuations have been put on hold and replaced by the unpredictable intentions of monetary policy officials. Bullish or bearish, the divergence of capital markets from underlying fundamentals exposes a considerable level of uncertainty and government involvement – a scenario that most investors will avoid. And, when they are looking to avoid assets that are denominated in traditional fiat currencies, there are few options. One of those very public and viable alternatives is gold.

Through Tuesday’s trading session, we would see a swell in turnover on the December futures contract. The 141,545 contracts traded over the past 24 hours was far more remarkable than the 76,022 of the opening day of the week. That being said, a gap in the largest gold-based ETF (SPDR Gold Trust) would lead to a very tepid rise in volume to 17.49 million shares (which is actually below the reading for September 30th.

Spot Silver - $22.92 // $0.89 // 4.05%

With a backdrop of remarkable performance for equities, high-yield currencies and energy commodities; silver would standout with an incredible 4.1 percent rally through the day. That being said, Tuesday’s performance was only the biggest rally since June 7th. That being said, futures turnover on the active (December) contract hit a record 53,459 while ETF holdings of the metal jumped 0.8 percent or 3.512 million ounces to a record high 445.5 million ounces.

                                                                                  Spot Gold Chart (Daily)

Chart generated using FXCM Strategy Trader

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