Crude and gold: prudence is best strategy

With crude oil and gold being in the spotlight this week, we need to keep our feet firmly planted on the ground as we take a look at the facts.

Looking at the raw data on crude oil, it is very hard to be supportive of a bullish price action for the near term. Crude oil, distillates, gasoline and propane stocks all reflect a much higher cyclical average than previously seen for this time of the year. This is underpinned by above-average production level and crude oil days of supply.

Taking this into consideration, these types of builds would not be a cause for concern, provided of course, that we are in a situation where demand is on the rise. According to the IEA: "Global demand is now forecast at 83.4 million barrels per day, 2.4 million less than 2008. There is growing consensus that economic and oil demand recovery will be deferred to 2010." And even judging by the short-term movements in demand, there is really nothing to suggest an increase in the present environment.

The recent price action paints a slightly different picture as we approach the top of the range for this year's prices in WTI. Having seen the sharp rejection of the downside this week, good discipline will be needed in approaching any shorts. But it is really hard to see why we should be anything but short, targeting a correction in prices over the next couple of weeks towards $41.

The gold price action is very similar to that of crude oil over the past week. However, there too, the upside does seem to be fairly limited. Much of the upside came on the back of news that China had increased their reserves by 76 per cent since 2003. I am slightly sceptical about all this talk, as to some extent it sounds like a bid to talk up the market.

We need to remember that we are trading far from the lows in stocks markets, and even when the carnage on equities was at its bleakest, we failed to break higher ground in gold. In saying that, it brings to questions whether gold should carry a high weighting in a general market portfolio. With little upside potential in gold, I still believe gold at 780 remains a realistic target in the near term.

In general, keeping it real and sticking to the facts remains the prudent strategy.

- The author is Head of Futures and Fixed Income at Saxo Bank

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