Commodities Essential - July 15, 2011

Update on QE3-rumored price action. 


Watching the commodities this week indicates very much that risk takers want that signal of QE3; and when that signal comes they’re going to jump all over it. It seems to me that it will come … though I’m just not sure how soon. As I mentioned in Currency Currents this morning, a major disappointment in the July US Nonfarm Payrolls may be the catalyst since the Fed seemed legitimately disturbed by the June Payrolls disappointment reported last week. 


Bernanke yesterday tried to stem QE3 speculation somewhat, but ultimately he’s probably not too concerned. I recently watched an interview with former Fed Chairman Paul Volcker where he suggests that any future QEs would have a diminished impact. I assume he is referring to the effective impact on the economy, rather than the impact on markets. I would argue that QE has already shown diminished effectiveness on shoring up the economy, which would explain why the money instead seeks out risky investment. A perceived lack of economic effectiveness may be the only thing that delays Ben Bernanke implementing QE3. 


Gold 


Gold had a strong week, buoyed first by safe-haven flows concerned about the Eurozone woes and then by risk appetite flows expecting QE3. Based on this price action and sustained positive sentiment for gold’s worth, I am looking for an opportunity to add back some gold exposure. After breaking out to new all-time highs this week, the time to add may be now. But I think gold is somewhat overbought and we can probably get in at a better price next week. Stay tuned for directions. 


Crude Oil 


Crude is finding itself sandwiched between technical support and resistance, which is probably why it has not been able to sustain one direction. I think if the QE3 rheotric and expectations subside in the near-term, crude oil will have a tough time trading anywhere north of $100 per barrel. The commentators have resumed their mostly bullish stance on crude, based on supply fundamentals, yet crude has not exactly responded well. I am thus cautious on crude oil and will consider short-term plays to capture returns by playing for a lower price of crude. 


Silver 


Silver’s sharp moves higher in the middle of the week could be attributed to a few things: first, there is a lot of overhead resistance that have served as likely targets (as mentioned in Currency Currents this morning); second, their are probably plenty of investors out there looking for a chance to get back in on silver and are afraid to miss out on any liquidity-driven move like the one that powered silver’s parabolic rise from February through April of this year. And while the breakout does look very appealing, I am cautious of buying in too early. If this week’s move, however, is not a head-fake, then I think we’ll still be able to get in before silver really “takes off.” But I think it better serves us to be patient for now


Grains 


After a rough stretch in the last half of June, the grains have bounced back. It appears, though, that this could just be a correction of the downside moves. Both corn and wheat are now testing technical resistance and resumed downside may be ahead if QE3 speculation is quelled for the time being. Additionally, traders seem to have lost the loving feeling they had when grain supplies were considered to be problematic; the surprising USDA report and the lack of adverse weather seem to have cooled off the speculation here. A position in an inverse grains ETF may be in order if risk-appetite sentiment deteriorates considerably to start next week.  


Natural Gas  


Nat Gas is making a nice move higher today through and above its 50-day moving average; there is now plenty of support in play. Natural gas and crude oil have not been able to maintain any meaningfully high positive correlation. To the contrary, the two seem more likely to move in the opposite direction, perhaps benefiting from shifts in capital flow to the other’s detriment. Thus, my near-term bearish bias for crude oil does not apply to natural gas. Continue to hold the position in UNG.