Correction Seen in Commodities as Stocks Plunged and USD Rebounded
Crude oil plummeted -2.3% to settle at 78.68 Monday (intra-day low: 77.97) as strong rebound in USD in NY session reduced appeals of commodity investments. Correction in US stock market with particularly weak financial sector diminished investors' risk appetite as strength in financial market is crucial for economic growth in the US. Specifically for the energy market, OPEC President's comment also weighed on prices. Apart from WTI crude oil, heating oil lost -2% while RBOB gasoline slid -0.5%.
The dollar initially weakened against major currencies amid a report saying that China should diversify its reserves into euro and yen. However, worries ere alleviated after the central bank's (PBOC) deputy governor Yi Gang commented the diversification should not cause short-term fluctuations in exchange rates.
USD also rebounded as stocks declined. Dow Jones Industrial Average dropped -1% to 9868 while S&P 500 Index lost -1.2% to 1067 as the market concerned that the government may phase out tax credits for homebuyers. Moreover, capital-raising from Bank of America through issuance of new shares triggered selloff in the equity market.
Oil agencies warned about the recent rapid surge in crude oil price. OPEC President and Angola's oil minister Jose Maria Botelho de Vasconcelos said that the organization may increase production target in December should oil rose above 75 and 'some countries are available to pump more oil into the market and if it comes to be necessary to pump more oil into the market this will be done'.
At the same time, IEA Chief Economist Fatih Birol also said that 'with the strong rebound of the economy, we will see high prices, especially at this juncture, as a significant risk to the recovery efforts'.
Comex gold plunged to as low as 1038.1 before recovering to 1042.8. The benchmark contract slid -1.3% Monday. Although global economic environment has improved, the yellow metal needs new catalyst to excel further. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.
According to Reuters, there's an increase in scarp gold supplies in the UK. In fact, scrap gold supply is rising all over the world as driven by elevated gold price. This puts additional pressure on gold price in the near term.