Where Energy, Gold and Equities Prices Are Headed This Week
Futures Outlook #75 November 17, 2014
Will volatility in commodity prices lead to stability in equities?
What does the Swiss referendum mean for the price of gold?
Has crude oil found a bottom?
Will positive government reports be enough to push the S&P to new highs?
The coldest weather of the season is upon the northeast this week, where do temperatures head beyond that?
Gold prices advanced over $30 on Friday because the “gold” referendum that’s on Swiss lawmakers’ agenda has gained support for passing on November 30th. The referendum calls for the central bank of Switzerland to hold 20% of its assets in gold, repatriate any gold held abroad and forbid it from selling the metal in the future. The implications of a yes vote can be far reaching. At this time the ratio of gold held by the Swiss National Bank (SNB) is about 8%, to achieve the ratio of 20% the bank would have to sell approximately USD68 billion in assets, mostly US dollars and the Euro, and buy 1783 tons of gold, according to an article published in the Financial Times. One contract of gold is 100 ounces; there are 16 ounces in a pound, and in the US 2000 pounds in a ton. That’s 3.5 million pounds of gold the SNB would have to purchase over a five year period. Or if you want to break it down to number traders can understand that’s a 560,000 contract order to buy, and possibly much more if the price of gold drops, remember the bank must keep a 20% ratio. If this sounds completely ridiculous it is, but as of the publication of this letter it has a 50/50 chance of passing. Passage of this could cause financial instability in the bank as it becomes less flexible in its financial dealings according to many experts. While Switzerland is not part of the EU, this could cause serious repercussions throughout Europe if one of the regions strongest economies shows signs of faltering in an already shaky environment. My bias for gold going forward or until November 30th will be based upon which way this vote will go. This could mean staying on the sidelines until things become clear. If this vote passes gold will be a buy, if it fails, the metal will head substantially lower. For traders that want to dip their toes in the market the indicator to watch will be poll results.
Crude oil prices settled positive on Friday after dropping to a 4 year low in overnight trading as OPEC officials reiterated their stance that production cuts will not be on the agenda when they meet at the end of November. Prices were further pressured by a report that US production of crude oil reached 9.1 million barrels per day, which is the most since 1986. The House of Representatives voted to approve the Keystone pipeline on Friday and this week the Senate will vote on and is likely to pass the same measure. These are mostly symbolic gestures as the public is well aware of the republicans’ stance on this issue. Once the Senate votes it will be up to the President to decide whether or not to sign the bill. Never has a company in the history of laying pipelines had to jump through so many hoops to have a line approved. Whether approval of the pipeline will be bullish or bearish for prices has supporters on either side of the issue. The bulls on one hand will say additional ways to move crude means additional options to explore for crude, ultimately leading to energy independence and the lifting of the ban on oil exports. The bears will say, approval means adding crude to an already over supplied situation. Prices for crude are near a 5 year low and many analysts are calling for an even further drop. I am not one of them. If you have watched or read some of the interviews with oil executives recently, each one of them has stated that oil needs to drop to $65 or $70 for wells to become unprofitable. An executive’s job is to portray his company in the best economic financial light, for this reason alone I think the breakeven price is higher. Banks will not wait till companies reach the breakeven price when they stop approving loans. And if production is curtailed it could eventually lead to supply tightness, causing prices to rise. OPEC is not as unified as they would present themselves to the press. Venezuela and other members want production cuts. Increased energy supply can depress prices but it can also spur economic growth and increased demand. Retail sales had an unexpected jump last month according to a report that was released Friday and analysts are attributing that to low energy prices. In fact analysts now think low gasoline prices will give a 3% boost to holiday sales. Buying out of the money call options continues to increase and managed money has added to long positions. Geo-politically the world has been quiet, almost too quiet. The short side is a very crowded trade and moves to the upside could be exaggerated due to weak shorts covering. Trading is all about risk reward and in my view, which is now joined by others, the reward is greater to the upside. My bias is higher; I am long and anticipate a move back towards $80 for WTI.
Government reports will be the main driver for equity prices this week as we receive numbers covering everything from housing, inflation and manufacturing. With a few setbacks the strength of these reports along with earnings has moved the S&P and the E-Mini to record highs. Now that earnings season has wound down these reports will be the focus. Housing has seen steady growth, but I think most would call the recovery a disappointment. Owning a house is not one of the priorities of the millennium crowd, renting for them is the way to go. Getting a mortgage is still difficult, and because of an aging population the amount of sales will not be as high as when the baby boomers were buying homes. With all that said I believe the market accepts the fact sales won’t be as high as the early 2000’s even with low interest rates, and this will not be a drag on the overall economy. Inflation should have been kept in check last quarter because of low energy prices. And finally manufacturing could see a rebound, and again credit low energy prices for the reason. I believe we will see positive reports in all areas and you will see another week of new highs for the Dow. The FOMC minutes will be released on November 19, don’t expect any surprises, the tone will be dovish. We are on the cusp of the holiday shopping season and because of low gasoline prices consumers have confidence in their outlook and extra dollars in their pockets. I am bullish on the Mini, but will wait for a dip to buy.
If you live in the northeast you will have to bundle up this week as the second cold wave descends from Canada. And looking beyond this week, below normal temperatures will stretch across the eastern half of the US for the beginning of next week too. This should steady a natural gas market that has surprisingly lost almost 13% in value since the high was set just a few sessions ago. It is difficult to short Natural gas, seasonally it doesn’t make sense, and winter is 3 weeks away. The injection number estimate last week was small and it was still a miss. This could be a reflection of high demand to start the winter. We will soon start to draw supply from the system and it will be interesting to see if the extraction numbers are similar to last years at this point. The latest COT report shows that long positions have been reduced by managed money, but that is not a surprise when you consider the price drop that we have had over the last week. What will be watched is whether those longs have now increased with lower prices. My bias is to the upside, I am long and I anticipate a move back to the 440 area.
These are the numbers to watch:
Gold has resistance starting from $1192 to $1196 which is the 21day MA, the next level of resistance runs from $1210 to $1215 which represents the 50 day MA, and above this the resistance is $1227 to $1232. Support begins from $1183 to $1178, under this there is support from $1169 to $1165 and under this the support is $1150 to $1145. My bias is neutral because of the Swiss vote hanging over the market, otherwise it would be lower. The area above $1190 is a good spot to initiate shorts, and use the 21 and 50 day MA’s as the area to place stops. A break above the 50day MA would be a good place to buy. I will watch the polls closely.
Crude oil has resistance starting from $7620 to $7660, above this there is resistance from $7800 to $7830 and above this the resistance runs from $7920 to $7970 which represents the 21 day MA. Support begins from $7420 to $7390, under this the support is $7330 to $7300 and under this $7200 to $7150 which will bring prices back to the summer of 2010. My bias is higher, I am long at $7450, and my stop is below the first level of support. My target is $78.
The E-Mini has resistance starting from 2039 to 2044; above this the resistance is 2051 to 2058 and above this 2070 to 2075. Support begins from 2027 to 2022 under this there is support from 2015 to 2010 and under this the support is 2000 to 1995. My bias is higher, but I will wait for a dip to buy. I am working an order to buy at 2020 and will use the first level of support as a stop.
Natural gas has resistance starting from 422 to 425 above this there is resistance from 430 to 433, which represents the 200 day MA and above this the resistance runs from 440 to 444. Support begins from 407 to 404, under this there is support from 397 to 392, which represents both the 21 and 50 day MA’s, and below this the support is 385 to 382. I am long at 416, my stop is 400 and I am anticipating a move above the 200 day MA.
Government reports scheduled for release this week will include:
Before deciding to participate in the commodity futures market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is substantial risk trading commodities. Past performance is not necessarily indicative of future results. There are no guarantees of profit nor of avoiding losses when trading commodity futures contracts. No representation is being made that any trade will or is likely to achieve profits similar to those in the past. No part of this letter may be reproduced without the consent of Anthony Grisanti