Weekly Fundamentals - Silver Surged but Not Supported by Fundamentals

By Roger Baettig | November 25 2012 6:23 AM

Risky assets got supports on Friday as investors were optimistic that the White House and the Congress would find a way out for handling the fiscal cliff, which might remove as much as US$ 600B from the US economy if the government allows the Bush-era tax holiday to end and automatically begin the spending cut in January 2013. Financial markets were also lifted by encouraging economic data from China and the Eurozone. In China, the flash manufacturing PMI compiled by the HSBC/Markit rose to 50.4 in November, the first time in 13 months. Details of the report sent a mixed picture, while the “new export orders” index soared to 52.4 while the “new orders” index grew at a slower rate. The HSBC noted “that the economic recovery continues to gain momentum towards the year end” but the recovery remains “fragile” as it’s still in its early stage. The government needs to continue its policy easing to stimulate the economy. Eurozone’s PMI data was also mixed. While the manufacturing PMI improved to 46.2 in November from 45.4, the services data slipped -0.3 point to 45.7 during the month. There have been concerns that Germany, the Eurozone’s biggest economy, would be dragged down by the debt-ridden peripheral economies. While it has been evidenced in some data that this worry has come true, the IFO data for November did offer some surprises. The business climate index soared +1.4 points to 101.4 in November. The current assessment index added +0.8 point to 108.1 while the expectations index jumped to 95.2 from 93.2 in October.

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Crude oil was volatile last week. Geopolitical tensions in Gaza Strip between Israel and Hamas sent oil prices higher amid concerns over supply disruption. However, the rally also faded as ceasefire began. The weekly decline in US oil inventory also sent prices higher. According to the DOE/EIA.total crude oil and petroleum products stocks slipped -6.21 mmb to 1088.04 mmb in the week ended November 16. Crude stockpile decreased -1.47 mmb to 374.47 mmb as stockpiles rose in 4 out of 5 PADDs. For fuels, gasoline inventory slipped -1.55 mmb to 200.39 mmb while distillate inventory plunged -2.68 mmb to 112.84 mmb.

Natural gas inventory fell last week. The DOE/EIA reported that natural gas storage dropped -38 bcf to 3 873 bcf in the week ended November 16. Stocks were +24 bcf higher than the same period last year and +168 bcf above the 5-year average of 3 705 bcf. Separately, Baker Hughes reported that the number of gas rigs gained +11 units to 428 in the week ended November 22. Oil rigs decreased -2 unit to 1 388 and miscellaneous rigs slipped -1 unit and the total number of rigs added +8 units to 1 81.7 Directionally oriented combined oil, gas, and miscellaneous rigs stayed flat at 194 units while horizontal rigs climbed +9 units to 1 114 and vertical rigs slid -1 units to 510 during the week.

Precious metals glittered with gains in silver and palladium outpacing those of gold and platinum. Soaring +22%, silver is the best performer so far this year. Yet, it is also the one having the widest trading rand, suggesting the lack of support of its rise from fundamentals. GFMS forecasts in its latest report that silver industrial demand would contract -6% y/y this year due to heavy destocking and pressure from thrifting and substitution. On the supply side, GFMS expects mine output to rise to a record high but official sector selling would weaken. Gold gained moderately last week and price remained hovering at the lower end of the recent 1700-1750 range for most of the time. Gold price has been on range-trading when denominated in USD. However, gold price in terms of Japanese yen has risen close to record. This was driven by the recent weakness in Japanese yen. Gold’s rise and yen’s decline were mainly due to the divergence in the fundamentals. The yellow metal represents non-fiat currency and the demand was lifted as global central banks strive to stimulate the economy by adding monetary easing measures which are expected to depreciate currencies. Recent weakness in Japanese yen has been driven by speculations that the opposition party will win the general election and it would be more aggressive in implement conventional and unconventional easing measures.

Oil and Gold Reports contributed by Oil N' Gold