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Oil Makes The World Go Round, Gold Finds Its Feet

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We open the week with a peek into the world of crude oil, which, as everyone knows by now has been falling precipitously. Right now, both benchmark prices – West Texas Intermediate and Brent North Sea – find themselves at the center of a tussle between ferocious long-term bears and a kind of cult that keeps repeating the mantra that the price of crude will “re-balance” itself.

We feel that oil could go modestly lower and then return to trade in the $50 to $55 range fairly soon. A numbr of factors are at play that prompt us to say this.

Oversupply is key, of course, and that condition shows no sign of improving. As we noted Friday, even the U.S. rig count has gone up for the last couple of weeks, either in anticipation of higher prices or because the shale industry has found greater efficiencies in its extraction and refining steps.

A counterpoint to the longer-term problems in crude price was reflected in trading today.

China's crude imports rose by 4% in July over June. This moderately bullish news in oil, however, was offset by trade figures that showed an 8.3% slump in China exports, stoking fears that Chinese economic activity was slowing. It also brought out worries the topping up of the tanks, so to speak, in China is a one-time event and not a long-term move. (How can it be? There is only so much storage space.)

Carsten Fritsch, an oil analyst at Commerzbank in Frankfurt, said this about China stocks: "They had fallen to a one-year low in June on account of record oil processing, so a top-up was needed."

Much of Asia is slowing along with China, South Korea among the economies adding to the slowdown in oil imports. Its tanker ports have been noticeably uncrowded.

Nevertheless, the jump in oil prices helped U.S. equities, which have been suffering at the hands of lower crude prices. Energy issues were up a combined 2.5%. On that, the Dow rose triple digits, up over 1.30%, while the S&P 500 and NASDAQ were up over 1% each.

As cooler heads prevail, the frenzy of anxiety over a Fed rate hike in September is ebbing. That leaves gold to recover in price, a move that was all too predicatable. The first reaction to Fed news, regardless of the content, is a bit of panic and insecurity – a kneejerk reaction that pushed gold down. Gold is now reacting in the opposite manner, showing some confidence in an interest-rate rise delay.

The same effect is also spilling oveer to U.S. and world equities. The dollar traded lower as well.

These moves were in the teeth of two sets of comments from Fed officials. Economic conditions in the United States have largely returned to normal according to Atlanta Fed head Dennis Lockhart, and a Federal Reserve decision to raise interest rates should come soon.

"I think the point of 'liftoff' is close," Lockhart said in prepared remarks for the Atlanta Press Club. "The economy has made great gains and is approaching an acceptable normal... conditions are no longer extraordinary."

Lockhart helped to move markets in the middle of last week when he said that he saw no reason to hold off on a September rate hike. 

Additionally, Federal Reserve Vice Chairman Stanley Fischer said on Bloomberg TV that full employment is close to being achieved.

Depending on what you think “full employment” is, there is no denying that inflation is low as low can get. Many commodities are still in a bearish trend and food and fuel, although often excused from inflation measures are also rising slowly. We need to keep our eyes on producer prices and wages. So does the Fed.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer