By Barani Krishnan
Investing.com – The first week of the Biden administration brought mixed fortunes to commodities – mixed is roughly the best way to describe it as gold and other precious metals rose for the first time since Christmas week while oil and most other energy markets fell.
While the various asset classes appeared to be directly aligned – i.e., the White House's aggressive drive for more incentives to raise gold and new covid lockdowns in China weighing down oil – the weekly movement percentages were modest, even puny when you consider what was at stake.
First, consider President Joe Biden's spending bill for the pandemic, which starts at $ 1.9 trillion.
This is not a casual treat as the U.S. budget deficit itself is already around $ 4.5 trillion after the Trump administration added $ 3 trillion plus COVID-19 stimulus for the past year. National debt is now approaching $ 28 trillion, and total debt to GDP is an impressive 146%.
And Biden has repeatedly said that the $ 1.9 trillion is just a start. By the time his government finishes fighting the pandemic, the federal deficit could be in double digits. One can only imagine the devaluation that will lead to it.
That's not all. Monetary expansion is also coming. While the United States appears to be in a relatively early stage of a monetary policy expansion cycle, the so-called M2 monetary base could increase significantly and prepare the country for a return to the 2008/2009 financial crisis days.
With the fiat monetary system watered down, higher inflation is certainly on the way. In the long term, the gold price correlates very strongly with the expansion of the monetary base.
Still, in the last week of December – and again in the first week of this year – bears were allowed to attack the price of gold with such ferocity that any rational thinking has been refuted, considering that the yellow metal has been a time-honored hedge against any dollar weakness or inflation .
The blame for the gold plunge during this period lay directly on rising US bond yields, namely the benchmark. The argument was that the bond market feared that if the trillions of dollars of stimulus kicked the economy faster than expected, interest rates would suddenly rise near zero. The idea persists despite vehement counter-arguments from the Federal Reserve.
What really made the cake, however, were institutions diverting money from gold to gold that had suddenly taken on a Tesla-like mania during the past few weeks during the FOMO – Fear Of Missing Out – rally. Some of that madness was doused in the past two weeks when Bitcoin lost 20% from record highs above $ 40,000. The craze for cryptos is likely to return as stupidity and markets can never be separated forever.
While many may miss it, the protection that gold offers in difficult economic and political times is real. Gold, unlike bonds, is not profitable. But it's solid insurance against currency devaluation.
Gold gained 1.4% in the past week. That was less than half of the 3.5% it lost in the past two weeks. As of Friday's close of trading of just over $ 1,856 an ounce, it remains more than $ 100 off its January high and more than $ 230 off its August high.
Bond yields aside, the other thing weighing on gold is concerns that, given the wafer-thin majority of a Democrat-led stimulus package, Biden may struggle to get some of his stimulus packages through the Senate.
The compromise would then be a series of medium-sized relief bills rather than clunky trillion dollar installments. That could mean a slower rise in gold prices than the runaway rally many had previously thought of.
In the oilfield, crude oil prices fell the most in five days of the first US crude construction since the December 7th week reported by the US government. It was a build that met the lack of commercial retail demand for fuel amid the coronavirus pandemic.
Despite Friday's decline, crude oil prices barely fell during the week and resisted any sharp move lower on the assumption that the Saudis-led OPEC production cuts in February and March will support the market.
What traders are ignoring is China's surge in lockdowns after the highest number of daily Covid-19 cases in more than 10 months. The other thing that could soon push the market into the background is production ramp-ups by Iran as the Trump-era sanctions are no longer expected to be rigidly enforced.
Gold Price & Market Summary
Comex in New York hit a final trade of $ 1,855.30 on Friday after the session was officially set at $ 1,856.20 an ounce – up $ 9.70, or 0.5% on the day.
During the week, the benchmark gold futures contract rose $ 26.30, or 1.4%. Over the past two weeks combined, gold lost nearly 3.5% in February.
"I think gold is building energy and is likely to make a solid move in the near and medium term," said Eric Scoles, market strategist at Blueline Futures in Chicago. He's not sure in which direction.
This is the problem for Scoles and many analysts.
Scoles points to the hourly chart for gold, which has seen a largely band-pegged move between $ 1,826 and $ 1,827 since Jan. 8. This suggests a consolidation market ahead of a major next move, he said.
"In my opinion, both the daily and monthly charts look a bit bearish," he added. “However, there is a notable bullish signal on the weekly chart showing a positive reversal. But I'm a little bearish until the fundamentals shift more significantly. "
Ed Moya, senior analyst at OANDA in New York, agrees.
"The bets against the greenback remain exaggerated and the dollar recovery may have to continue before dollar weakness can resume," Moya said. "Gold appears to be consolidating, but the longer-term bullish outlook should remain intact amid mounting deficits and mounting inflationary pressures."
Oil price and market summary
New York-Traded, the key indicator of US crude oil, hit final trading of $ 51.99 a barrel after Friday's official session fell 86 cents, or 1.6%, to $ 52.27 a barrel. It was WTI's biggest one-day slide since December 18th.
But for the week, WTI only lost 0.2%.
London-Traded, the global benchmark for crude oil, closed at $ 55.08 a barrel. Official trading on Friday was $ 55.41, down 69 cents, or 1.2% on the day.
For the week, however, Brent gained 31 cents, or 0.6%.
At the front, the Energy Information Administration reported 4.35 million barrels of construction for the week ended January 15. This was the first increase in US crude oil inventories since the week ending December 7th and was contrary to market expectations for a 1.17 million barrel draw.
A huge slump in US crude oil exports, which fell by almost 750,000 bpd or barrels per day, is contributing to crude oil production. To offset some of the decline in exports, the United States also imported fewer imports last week, to 194,000 bpd, EIA data showed.
For fuel products, a draw of just over a quarter of a million barrels was recorded, versus an expected build of 2.8 million. It did so after building a total of 9 million barrels in the past two weeks.
Because the construction was less than half a million barrels against the expectations of an increase of 1.2 million. Distillate inventories rose 14.5 million barrels in four weeks.
In addition to the US, the outlook for oil was also worrying internationally.
As of last week, China began restricting the movement of around 28 million people after suffering its first coronavirus death on the mainland since May.
In Iran, officials reported Friday that they were ramping up production as the previous Trump administration's sanctions closely monitored the regime.
Iran once shipped more than 3 million barrels a day around the world, and while its crude oil shipments were now a fraction of that, it was able to regain its oil export momentum very quickly. Given the impact Tehran could have on the staged production of the global oil alliance, OPEC +, and the wider impact it has on oil prices, this should be watched closely.
Energy calendar ahead
Monday January 25th
Private Cushing Inventory Estimates
Tuesday, January 26th
Weekly report on oil stocks.
Wednesday January 27th
EIA weekly report over
EIA weekly report over
EIA weekly report over
Thursday January 28th
EIA weekly report over
Friday January 29th
Baker Hughes Weekly Poll on
Disclaimer: Barani Krishnan uses a number of views outside of his own to diversify his analysis of each market. He does not own or hold any position in the goods or securities of which he writes.