Fed member comments, geopolitics and the weather all had a hand in commodity market price action last week. Unusually low volume also contributed to the price swings as well as below average volatility.
At the start of the week, the major players in gold, crude oil and natural gas appeared to be willing to sit on their hands as they worked out potential scenarios regarding the Federal Reserve’s interest rate decision on July 31, simmering tensions in the Middle East and uncertain weather patterns.
As the week developed, however, traders were presented with a number of surprises that just created more uncertainty. When combined with the light volume and the absence of several major players, two-sided price action was fueled.
If you watched the price action in gold from Monday to late Thursday, you were likely to conclude that investors were content with holding prices in a range until the Fed interest rate decision on July 31. The market remained underpinned by expectations of a 25-basis point rate cut by the U.S. Federal Reserve, and capped by low expectations of a 50-basis point rate cut by central bank policymakers.
Last week, August Comex gold futures settled at $1426.70, up $14.50 or +1.03%.
That was until late Thursday afternoon when New York Federal Reserve President John Williams made dovish comments that spiked the probability of a more aggressive half-a-point rate cut to 71.5%, according to the CME. The news drove August Comex gold to a multi-year high at $1454.40.
Gold prices began to collapse when New York Fed officials downplayed Williams’ remarks and the Wall Street Journal reported the Fed was not likely to make the 50-basis point rate cut, but would instead cut rates 25-basis points, while standing ready to continue to cut rates, if necessary, in the future. At the end of the week, the chances of an aggressive rate cut fell to 21.5%. Gold prices could drift lower this week if this probability figure continues to drop.
Since the first of the new year, crude oil prices have been primarily supported by the OPEC-led supply cuts, and the U.S. sanctions against Venezuela and Iran. Keeping a lid on prices has been rising U.S. shale production and concerns over lower demand due to a slowing global economy.
Speculative buying has offset some of the worries over increasing U.S. supply and low demand, helping crude oil to recover from a recent steep sell-off. This speculative buying has been tied to rising tensions in the Middle East between the US and Iran, and the UK and Iran.
The speculative buying came to a screeching halt last week when the U.S. announced that Iran was willing to talk about its nuclear program. This triggered a massive liquidation and prices broke sharply. Even with the alleged shooting down of an Iranian drone by the U.S. Navy, and the seizure of a British tanker by Iran, crude oil showed a muted reaction. This is because traders know that unless they see an actual supply disruption in the region, it’s not bullish news.
Natural gas prices posted a steep decline last week in a move that may have confused traders. Certainly, this analyst was surprised to see extremely hot temperatures nearly covering the entire United States, and natural gas prices trading lower. Even last weekend’s passing of Hurricane Barry couldn’t give prices a boost as it led to lower demand.
Last week, September natural gas settled at $2.228, down $0.206 or -8.46%.
The problem for bullish natural gas traders is the heat is moving too quickly to feed lingering periods of high demand. It seems that every hot spell is being followed by a quick return to normal temperatures. Until this pattern changes, any rally is likely to be fueled by short-covering rather than aggressive buying. And the major short-sellers are just waiting to add to their bearish positions on any rally.