Commodities outlook: A sign that gold could fall

Industry analyst Rajan Dhall discusses where investors should expect oil, gold and copper prices to move this week.

The theme in the oil markets has shifted from supply disruptions in Venezuela and Iran to increasing supply from America, Russia and OPEC.  

First of all, let's start with the States; there have been comments recently that America had asked OPEC to increase production by one million barrels of oil per day (bpd). The markets reacted as you would expect and sold off.  

Looking further into the price action we can see a great pullback in the weekly chart below. Last week we posted a rejection candle which means we could see a move higher again. But take this with a pinch of salt as, if there is any more news on additional supply, a move down could be expected. 

As it stands, on Wednesday we could see production levels increase in the latest Department of Energy (DoE) data, but remember, the US is preparing for the holiday months when demand for oil is very high, so a certain amount of this will be priced in and a near term move back to the mean would not surprise. 

The next OPEC meeting is on 22 June, and there has been much talk about the plans to exit the supply cut pact. Any news on this would affect price dramatically. If we see no talk on the exit of the deal, a move higher can be expected (and vice versa). If a concrete plan is created for an exit, the move down (or size of) could be a dependant on the schedule.

Past performance is not a guide to future performance

In the base metals complex, we have seen some good moves over the last week - copper rose nearly 7%.  Key economic indicators from China have either come in line with expectations or exceeded to aid this. 

Over the last month, China’s consumer inflation rose by 1.8% yoy in May and the producer price index (PPI) rose by 4.1% in May from a year earlier, bolstered by a recent jump in commodity prices according to China’s National Bureau of Statistics.  

Also, on the supply side, watch out from any resolution at the world's largest copper mine Escondida as the worker strike continues.  Escondida's No 1 union stated that BHP Billiton had sent a counter-offer in, which could advance progress in the ongoing dispute between the two parties amid rallying Copper prices.

Past performance is not a guide to future performance

Most of the price action this week in precious metals will be governed by the FOMC meeting on Wednesday. The market has priced in a US rate hike, but it will be the comments after that will dictate market reaction from here.  

Economists are still debating whether the Fed will/should hike three or four times this year, and we have already covered the impact on the yield curve and potential signals from the long end of the curve.  

Gold remains a safe haven, but recent price action may have prompted some to forget this (!) and current risk sentiment on global tensions have not moved the market recently - even with Italy in the midst of a political crisis. 

The correlation between stocks, bonds and gold seems to have broken down as whenever stocks fall, yields rally but gold remains stagnant. This is a potential sign that gold could fall further as prime opportunities for a rally have been ignored.  

Over the next week we will get more clarity in the wake of the landmark Trump/Jong-un meeting as well as the Fed.

Past performance is not a guide to future performance