Crude Oil Drop Predictable But Sideways Gold Surprises

You could assign many reasons for the drop in crude oil prices – and all would probably be right. Let’s enumerate a few prime candidates.

First, oil has come too far, too fast. Yes, indeed. It’s shocking that there hasn’t been broader profit taking earlier than today. Goldman Sachs’ yellow caution flag to “slow down” helped fuel the sell off.

Second, there was horrible, terrible, ugly data from China on exports. China's February exports did some serious free falling by 25.4% from a year earlier while imports dropped 13.8%.

Third, Kuwait, which produces 3 million barrels per day, threatened to freeze output only if all major producers participate. That presumably includes Iran, which has balked at the plan.

Fourth, Reuters said a poll of oil analysts they regularly turn to predicted that U.S. crude stocks rose about 3.6 million barrels last week, pushing total inventories to a record high for a fourth consecutive week.

You would think that gold would have traded convincingly higher given the tumble in oil and the consequent fall in equities worldwide (except for Shanghai, which saw some bargain hunting).

That wasn’t the case, however for the yellow precious metal. We look at this as due to some profit taking and perhaps a normal pause in a very healthy rally. Unless there is a surge in equities’ prices, there is nothing to keep gold from rising. We predict better stock prices but nothing that would push gold off its perch for now.

Except for the United States, national and regional banks are putting in place expansionary monetary policies. While that can occasionally hurt dollar-denominated commodities, eventually that inflation trickles down into prices. Greenback strength in the dollar/euro pair could cause some depressive effects on gold as the ECB keeps trying to stimulate the euro zone through monetary means. But those pressures will pass.

Gold had risen as high as 1276 before falling back to the low $1260’s range.

Oddly enough, other haven plays appeared stronger today. The Japanese and Swiss currencies found plenty of buyers and the U.S. dollar sold off. The euro sold off even more emphatically.

The 10-year U.S. bond yield dropped as face price rose, an indication that appetite was stronger for bonds, generally considered a safe haven.

Note that since March 3^rd, the VIX volatility index has been creeping up. Let’s keep an eye on it.

Wishing you as always, good trading,