Displaying items by tag: Commodities
The oil market is nervous, which seems likely to lead to volatility. The surprise is that sharp moves may trend to the upside rather than the downside. The two big concerns are about how sanctions on Iran may crimp output, as well as how OPEC lacks spare capacity to boost output. Such concerns are a stark change from the attitude that accompanied the sharp price falls in recent weeks, when supply seemed to be expanding strongly.
FINSUM: The Saudis are saying they will expand production to a record, but the reality is they do not want to do so because they don’t want prices to fall. It seems like OPEC will walk a line to keep prices where they are.
The amount of data pointing to recession is growing strongly. Not only are rates and yields rising quickly, but housing has been showing much weakness. Now there is another major leading indicator flashing red—commodities. Commodities are often seen as a key economic bellwether as they tend to show aggregate demand ahead of actual economic figures. By that measure, things are looking bad. Bloomberg’s commodity index has dropped 5% this summer, with both agricultural commodities and metals performing poorly. One factor hurting commodities is the Dollar, as the currency is strong and because commodities are priced in Dollars, it tends to hurt foreign demand.
FINSUM: Everything we are seeing seems to point to a peak. Housing has turned negative, commodities are weakening, and rates are rising. Did the stock market see its bull market peak last week?
You want to know an asset class that has performed well in periods of rising rates? Take a look at oil. In periods of quickly rising rates and yields, oil and oil-related stocks have done very well. In fact, Van Eck’s Vectors Oil Service ETF (OIH) has been the best performing fund of its type in such periods. “Shares in the VanEck Vectors Oil Services ETF saw a 6.5 percent boost over the month when rates jumped, while shares of the United States Oil Fund ETF ran up 4.5 percent”, according to Kensho.
FINSUM: Oil and banks tend to do well in periods of rising rates. The former because rising rates usually mean a strengthening economy, and the latter because of both an improving economy, but also wider net interest margins.
Gold has been in an extraordinary multi-year slump. From its peak of around $1,900 a few years ago, the shiny metal has sunk into a multi-year bear market, recently settling at around $1,200 an ounce. However, a couple of factors are coming together that may mean the bad times are over. The first is that there has been consolidation in the mining sector, but secondly, because the pending trade wars have meant that central banks have been buying more gold as a safe haven. This type of demand rose 8% since last year, and gold buying by central banks is off to its best start since 2015.
FINSUM: Unfortunately, we have to disagree with this article. Buying gold as we move into a higher-rate and stronger Dollar period contradicts all the fundamentals of the market. Furthermore, we think if gold was going to benefit from trade war fears, it would have already started.
Gold has been in the doldrums for a long time (and we mean long). The shiny metal is still down over 35% from its peak in 2011, and it has lost 8% this year. However, Barron’s is arguing that it is time for gold to shine. They argue that since gold is currently very cheap relative to other asset classes and inflation is increasing, the metal is poised to make a comeback. Gold has historically been a good hedge against inflation, which may drive its renewed appeal as inflation rises. The metal is currently trading around $1,200 per ounce.
FINSUM: The problem with this argument is that gold also tends to weaken as rates rise (because it has zero yield). So, how much will that offset any gains?