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Precious Metals & Energy – Weekly Review and Calendar Ahead

(C) Reuters.

By Barani Krishnan – At the cusp of $2,000 an ounce, gold’s front-month contract on Comex looks set to sail past the barrier again in the trading week beginning Aug 3.

I say “again” because, chart-wise, December gold had already peaked at $2,005.40 during the just-ended week, before replacing the August contract as Comex’s new benchmark. So, the question really is how far beyond $2,000 it will get. That’s where a whole new minefield opens up.

From modest resistance levels of around $2,010 to highs of $2,200, a huge range has been forecast for December gold’s upside before its expiry two days before New Year’s eve 2021.

I’m not even going near those $3,000 and above predictions, mindful that I can already hear the gold bears whimpering from below: “Are-you-nuts?”

The bulls’ logic is that with the U.S. Congress embarking on another trillion-dollar stimulus — more than $3 trillion have already been issued — it’s a no-brainer to dump the dollar in the emerging hyper-infllationary environment and run to the safety of gold.

Despite that, for every bullish call out there for gold, there’s a constituency that says the market is overloaded on the top side and a correction of as much as $200 will be triggered soon. Some are not just using hyperbole, but sensible arguments and charts as well, to back up their thesis.

One of them is David Lin, associate producer at Kitco News, the media portal run by precious metals trader Kitco. In a blog that ran Friday, Lin reminds us that almost immediately after hitting record highs above $1,900 in September 2011, gold retraced, beginning a long-term bear trend that troughed in December 2015.

But in the same breath, Lin quotes Dan Oliver, founder of Myrmikan Capital, as saying he could see $10,000 an ounce happening — though he doesn’t say when.

“The Fed, as you know, has been on a massive purchasing spree because of the virus situation, and so therefore the equilibrium price of gold is going up commensurately, and so the numbers now to balance that balance sheet are enormously high,” Oliver apparently told Lin in an interview. “My [forecast for gold prices] has changed. I’m at $10,000 now.”

Rick Rule, president of Sprott U.S., also tells Lin that he doesn’t think Oliver’s call is over the top, though he thinks a correction will be necessary before that.

“If you asked me my gold price outlook over the two-year or three-year term, I’m bullish to the point of being wildly bullish,” Rule told Lin in an interview, adding that there could be lots of volatility in the coming months.

It has indeed been a parabolic year for precious metals. Silver, the other big winner, took the crown for commodity returns in July, delivering a whopping 34%. September futures on Comex surged from a near 12-year low of $11.65 per ounce in March to a 7-year high of $26.26 an ounce in the just-ended week.

Even base metals have joined the ride. Copper, struggling to regain its $3 per lb foothold for nearly three years, hit $2.99 in the just-ended week, virtually getting there. For July, copper was up more than 11%, although for the year, it remains down over 5%.

The same couldn’t be said for oil though, the most significant component of the commodities complex.

Like a shadow in the background that could suddenly leap to the front depending on how the light is cast, OPEC’s looming supply increase is threatening to shroud any bright fundamentals left in a pandemic-hit oil market that ended July trading up just $1 a barrel.

The Saudi-led Organization of Petroleum Exporting Countries is due to restore 2 million barrels of oil a day to world markets under the terms of its deal on output restraint with non-member allies steered by Russia.

That’s coming at a time when the rebound worldwide in fuel demand is under threat from a second wave of Covid-19, as more and more countries — Australia and the U.K. being the latest — tighten lockdown measures to stop local flare-ups.

U.S. crude ended July up 0.4% while remaining down 34% on the year.

Federal Reserve Chairman Jay Powell warned on Wednesday that the pace of economic recovery seen since the first business reopenings in May has slowed. He also said some jobs lost to the pandemic may never return, adding that those laid off by eateries and places of public entertainment such as restaurants and bars just did not have enough jobs to return to.

“The bears … think that demand is not going to come back as strongly as expected,” said Scott Shelton, energy futures broker at ICAP in Durham, North Carolina.

“They are watching the margins and physical markets. They are watching the lack of Chinese crude buying. They look at the picture on the physical side and don’t see the stock draws that many of the banks and consultants see. They talk about a resurgence of COVID in not only the US, but the rest of the world and think that there may be another large shutdown coming. They think that supply is going to come back and demand won’t.”

Precious Metals Weekly Review

One day — that’s all the bears in gold could manage in keeping prices down as the yellow metal bounced back Friday from a brief selloff across markets forced by the shock collapse of U.S. gross domestic product in the second quarter.

“Gold mania continues and after tentatively clearing the $2000 level, traders are starting to doubt whether a profit-taking pullback is in the cards,” said Ed Moya, analyst at New York-based online trading platform OANDA.

Spot gold, a real-time indicator of trades in bullion, last traded up $19.47, or 1%, at $1,976.11. It fell a meagre 0.6% in the previous session, touching a session low of $1,939.69 that remained well above the level it attained when it rewrote for the first time this week record highs from 2011.

On New York’s Comex, the August futures contract last traded up $28.90, or 1.5%, at $1,971.20 before expiring and going off the board. On Thursday, August fell just 0.5%. For July, Comex gold ended up 9%, for its biggest monthly gain since February 2015. For the year, gold futures are up 28%.

That aside, Comex’s December contract — which will be its benchmark from next week — settled on Friday at $1,985.90. That means gold traders will see an automatic gain of $23 on the front-month when the market reopens Monday.

Further, December gold hit a record high of $2,005.40 in Friday’s Asian session, before the start of European and U.S. trading. That also means the new front-month for Comex would likely aim for a higher peak in the new week to sate gold bulls pursuing $2,000-territory.

Friday’s rebound came as the passage of a new $1 trillion coronavirus relief bill in the U.S. Congress was being held up by brawling between the Trump administration and rival Democrats on whether weekly benefits for the unemployed should remain at $600 a person or be cut to a third as the administration hopes.

“Safe-haven demand remains strong as Congress and the White House continue to struggle to break the impasse on extending emergency unemployment benefits,” Moya said.

“Gold will continue to shine bright as real yields continue to fall deeper into negative territory, virus surges will keep economic recoveries limited, and the stimulus trade will not go away until the labor market bounces strongly back.”

Silver, which rallied along with gold through most of July, rose 36% for the year, outperforming not just the yellow metal but the entire commodities complex as well.

Silver’s front-month contract on Comex, September, last traded up $1.263, or 5.4%, on Friday at $24.625 per ounce.

Energy Weekly Review

New York-traded West Texas Intermediate, the benchmark for U.S. crude futures, last traded at $40.44 per barrel on Friday, up 52 cents, or 1.3%. At the end of June, the front-month contract for WTI settled at $39.27.

London-traded Brent, the bellwether for global crude prices, did final trade in New York at $43.64, up 39 cents, or 0.9%.

OPEC’s decision to cut about 7.5 million barrels from August instead of 9.6-million bpd observed since May comes on the heels of data showing the U.S. economy suffered its worst collapse ever — a drop of nearly 33% — in the second quarter.

“When OPEC Plus decided to raise output early last month, it looked as if the market was going to need those extra barrels,” said Phil Flynn, analyst at the Price Futures Group in Chicago.

“Yet now with more uncertainty about a second wave of the coronavirus and a devastating weekly jobs reports, a historically wrong U.S. GDP number, perhaps at this time, a production increase might not be a great idea,” added Flynn, who typically has a bullish outlook on oil.

Friday’s trade in oil was also suppressed by news showing record quarterly losses at both Exxon Mobil (NYSE:NYSE:XOM) and Chevron (NYSE:NYSE:CVX), the two largest oil producers in the United States. Earlier in the week, ConocoPhilips, another U.S. oil giant, announced a $1-billion loss.

According to Gasbuddy’s Patrick de Haan, gasoline demand on Thursday was -4.50% from the week ago level, while for the five days through Thursday, it was down -0.9% on the corresponding period a week earlier.

Reflecting those concerns, U.S. gasoline futures fell in Friday’s trade, underperforming the broader crude market.

New York-traded RBOB gasoline last traded at $1.1775 per gallon, down 13.3 cents, or 1.1%. For July, U.S. gasoline 1.2%.

Energy Calendar Ahead

Monday, Aug 3

Private estimates on Cushing oil inventories from Genscape.

Tuesday, Aug 4

American Petroleum Institute weekly report on oil stockpiles.

Wednesday, Aug 5

EIA weekly report on crude stockpiles

EIA weekly report on gasoline stockpiles

EIA weekly report on distillates inventories

Thursday, Aug 6

EIA weekly report on natural gas storage

Friday, Aug 7

Baker Hughes weekly survey on U.S. oil rigs