Oil and gold prices extended rallies in European session. Although Saudi Arabia and other OPEC countries pledged to replace any loss of oil production in Libya, crude oil prices remained strong with the front-month WTI crude contract surging to as high as 103.41 and corresponding Brent crude contract approaching 120. Gold changed little but maintained an upbeat tone. Base metals, however, got hammered amid worries that elevated oil prices would dampen global economic recovery.
Currently trading at 1114, the benchmark Comex gold contract has been hovering around a 7-week high. It's likely that the metal will challenge the all-time high made in December should geopolitical tensions in the MENA region intensify. Gold's near-term rally has been mainly driven by the recent unrests and oil prices. Indeed, the relationship between oil and gold was not strong until the introduction of commodity indices around 10 years ago. While the constituents in a commodity price index include energy, metals (precious metals and base metals) and agriculture (eg. grains and livestock), energy products usually receive high weightings. For instance, the energy component contributed 78.7% of the S&P GSCI Index as of May 2008. In the Thomson Reuters/Jefferies CRB Index (TR/J CRB), petroleum-based products make up 33% of the weightings. Funds or trusts tracking these indices are popular and fund managers have to purchase considerable amounts of bullion to maintain the weightings from time to time.
Tensions-driven strength in oil prices has exacerbated inflationary worries. This also benefits gold as central bankers in advanced economies are most likely to maintain accommodative monetary policies for some time. In an interview with Financial Times, the Chicago Fed president Charles Evans said that monetary policies should stay easy as the US was still in a 'liquidity trap'. He stated that he's 'pleased at the improvements in the economy' but it would be 'a while before we're safely past these conditions'. With monetary policies not going to be tightened to curb inflation, gold should have room to climb higher.
On the dataflow, US durable goods orders probably gained +2.9% m/m in January, following a contraction of -2.3% in the prior month. Excluding transportations, gains would be trimmed to +0.4% only. Initial jobless claims probably fell -5K to 405K in the week ended February 19. Released earlier today, Eurozone's consumer confidence is expected to have recovered to -10 in February from -11.2 in January. Other confidence readings (economic, industrial and services) also showed improvements. If oil disruptions resulted from the unrests in the MENA region prove to be detrimental to growth, a drop in confidence level cannot be ruled out.