Gold Falls Then Can’t Regain Momentum As Oil And Equities Tumble

Gold fell back today, based primarily on strength in the U.S. dollar, which on its own pushed the yellow precious metal down 0.70%. Nevertheless, it is on track for a solid weekly gain. Aside from the swaggering greenback, gold was facing headwinds from early up-moves in oil and equities, although as both of those markets soured; gold did not commensurately rise in reaction.

It was a risk-on day in the U.S. 10-year bond market. Yields rose to make the face price more attractive.

Are we getting tired of talking about oil and seeing the investment world through its prism? We sure are. But, as the saying goes, we don’t make the news, we just report it.

U.S. benchmark oil – West Texas Intermediate crude – rose as high as $34.69 today before falling back to the $32.75 range in afternoon trading. That mark left it down about 0.25% as of late afternoon in New York.

We are relieved to tell you, though, that some of the rise is attributable to conditions other than bald-faced speculation.

The U.S. oilrig count was down by 13, a continuing pattern that began months ago when it was clear that oil was going to stay low for an extended period. Baker Hughes puts the current U.S. rig count at 400.

Additionally, because of incidents of sabotage and general disrepair caused by political and social unrest, Nigeria and Iraq are producing 800,000 barrels fewer per day than they did a few weeks ago. This will last approximately two more weeks while repairs are made.

On the other hand, Iran is producing about that amount above and beyond what it had produced before international sanctions.

Most of this oil will come from the Azadegan oil field on the Iran-Iraq border. The two countries share this field, which holds a predicted 5.6 billion barrels of reserves. Iranian Minister of Petroleum Bijan Zangeneh said recently that Iran is planning to reach a daily crude oil output of 4.6 million barrels per day.

However, if you think that there is long-term chance oil prices will return to their halcyon days, think again. Here is food for thought. In total, today the United States has about 40 billion barrels in proven reserves. Canada has 172 billion. Mexico has about 15 billion barrel. That’s 227 billion barrels of oil.

World consumption will align with world production by the end of 2017 at around 5 million barrels per day. So, using only North American reserves, there is enough oil at 5m bpd for the next 125 years (or 45,400 days). And it’s been proven that it can be extracted and sold at a higher, but not prohibitively expensive cost.

The gyrations of crude prices dragged U.S. equities around, thrashing the weakest of the pack. The Dow and S&P, which are heavy with oil-related stocks, are off mildly on the day after rising before noontime. The NASDAQ showed a very modest uptick.

Europe and Asia were up on the good side of oil prices and closed before crude retrenched in the afternoon in New York. The DAX in Germany was up almost 2.00%. Hong Kong rose 2.5%.

Financial issues on the New York indexes were up for half the day and then headed south with oil. There was some other fundamental news behind this morning’s rise.

The core personal consumption price index, which excludes food and energy and is the Fed's preferred inflation measure, showed a 1.7% rise in the 12 months through January, the largest since July 2014.

This has led to thinking among strategists that, in fact, other interest rate increases are still on the table for 2016. We say, “Beware of Fed.” When they sneeze, markets catch pneumonia.

"While most thought June was off the table (for a rate hike), this kind of data puts the path to getting to a June rate hike very clear, especially if the volatility in the market dissipates," said Jeremy Klein, chief market strategist at FBN Securities.

Wishing you as always, good trading,