As governments race to reflate, which will lead - oil or gold...?
GOLD AND OIL naturally figure large in this week's scenario. Particularly, oil over gold, if you've been listening to commodity maven Jim Rogers, notes Brad Zigler at Hard Assets Investor.
Rogers thinks the International Monetary Fund (IMF) is a likely seller of some of its 3,200-ton metal stash, so he's talking up black gold over yellow.
It's not as if the world finds this surprising. Whether the IMF sales take place or not, the world's been spoiling for a showdown between the two commodities.
Let's look at oil first. The nearby crude contract gathered strength in its 50% retracement of the February-March rally, and is now poised to challenge the run-up's $54.64 high.
True, near-term fundamentals still indicate oversupply. The re-growth in the contango tells you that. The quarterly carry trade was pinched to 80 cents a barrel a month ago; now it's in the $4-5 range. If you've got a carrying charge market, you've got commodity enough to carry into future deliveries.
No, this has been a rally built more on expectations of improving economic prospects - hand-in-hand with the equity market rally - than on a supply retraction. Oil inventories at the Cushing, Okla., terminus may be down from their peak, but supplies in other regions have ballooned to more than compensate for the off-take.
Now, about gold. Momentum and sentiment have turned sour for the yellow metal. But you probably suspected that, right? The recent 30,000-contract downdraft in COMEX Gold Futures open interest was led mostly by hedge fund sellers. Net long positions held by Large Speculators tumbled more than 18% last week.
Technically, gold's looking vulnerable. Pushed to test its 100-day moving average on the downside and weighed down by overhead resistance at the $888 level - formerly support for the February-March topping action - the nearby market's squeezed. Gold spreads (the gap between prices to buy and sell Gold Futures) indicate plenty of liquidity in the lease market. Supply's not the issue for gold either. At least not yet.
Oil's technical strength over gold is readily apparent in the gold/oil ratio. A rising ratio, meaning the Gold Price is gaining on oil's, is indicative of poorer economic conditions to come. A decline, not surprising, signals the market's forecast of better prospects. The ratio's been testing the 17-to-1 level over the past couple of weeks. An oil breakout could put this indicator on course to look for support at the 15-to-1 level.
It seems traders are essentially anticipating a reflation trade by making one of the primary engines of inflation, oil, their target rather than Gold Bullion, inflation's classic beneficiary.
This should be an interesting week.