Among some of the themes adding to the negative sentiment was Japan announcing the biggest economic contraction for 35 years and fears of banking upheavals in Eastern Europe, similar to the Asian crisis of 1998, and the potential fallout on Western Europe.
The S&P not impressed by the latest US stimulus package made a new low for the year dropping below $800, while the CRB commodity index fell to a six-and-a-half-year low on a broad based sell off with the exception of precious metals.
The major commodity story of the week was the ongoing and increasing flow of investor money rushing into gold and silver perceived to be a safe haven. A few milestones were reached as well with the worlds largest Gold ETF (Exchange Traded Fund) breaching 1,000 metric tonnes or more than 35 million ounces.
The combined holdings of the eight major Gold ETF's now stands above 47 million ounces and over the past month flows into ETF's has more than equalled global mining supply. This huge inflow helped drive Gold prices higher during the week. The last remaining points of resistance before the all-time high at $1,034 on the Comex Gold were breached on Friday. Some are even speculating that a decisive break above $1,000 could accelerate the rally.
The sterling performance from silver has surprised a few people given its use as an industrial metal but the gold inspired rally has driven it to the top of the commodity leader board at 28 per cent so far this year followed by another surprise, platinum which is up 16 per cent. Both metals are characterised by lower liquidity, which explains some of the outperformance.
Moving on to base metals where high grade copper once again reacted to the renewed selling in equity markets and the stronger dollar. The China demand and US stimulus stories is now all forgotten and the naked truth is that demand continues to drop and stock piles continue to build. Against this backdrop HG Copper had nowhere to go but down falling by eight per cent during the week.
Technically support is located at $139.20 on the future for March delivery, while a break opens up the risk of testing the 2008 low at $128.55.
WTI crude oil had an interesting week and some might argue that the price action during the week could be the early sign of a recovery. First of all the Contango between spot and the new month of April contracted dramatically during the week reaching "normal" levels in the process. Secondly the steep down trend from last summer has now been broken. Thirdly the weekly US inventories showed a drop for the first time in seven weeks.
The forward curve overall flattened as well as back months got sold. The curve is now implying an average crude oil price for 2009 around $50, which is a downward shift compared to a month ago. The rally in March therefore most of all looked like a squeeze on short positions speculating in a collapse like the one we have seen at the previous three expires.
Our main worry still concerns the oversupply in the market from a continued slump in demand combined with the massive long position established through ETF's. The biggest ETF now hold more than 90,000 lots of April Crude and has lost more than 55 per cent over the last three months. Against this backdrop a quick and decisive move higher is necessary in order to avoid liquidation from disappointed long positions.
Technically the all-important 10 year trend support is found at $32.40 while trend line resistance can be found at $41. A break above will neutralise the selling seen this week and the $40 to $50 range will be back in play.
Natural gas continues to confirm its place as the worst performing commodity this year. The month long sell off continues and it reached a six-year low at $4 this week, which is more than 70 per cent down from last summer. Inventories are dropping at a slower pace than expected given the time of year as mild weather and the economic slowdown have curbed demand from factories and power plants.
Technically a break below $4 on the March futures contract could see additional losses towards support at $3.60, while resistance now comes in at $4.50.
- Ole S Hansen is a commodity analyst with Saxo Bank.
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