Currencies and Metals Outlook- An Excerpt from CRB'S Futures Market Service

CURRENCIES

The dollar index corrected further up to a 1-month high from its recent 15-month low. The euro corrected down to a 1-month low from its recent 15-month high, while the dollar/yen is consolidating on either side of 90 yen, modestly above its recent 9-month low. Bullish factors for the dollar include (1) euro weakness after the EU Commission predicted that further losses at European financial institutions may total 400 billion euros ($586 billion) through next year, and (2) short covering in the dollar ahead of the upcoming G- 20 summit in Scotland. Bearish factors include (1) the post-FOMC statement that stated the Fed intends to keep interest rates low for an "extended period," which will continue to weaken the dollar's interest-rate differentials, and (2) the prediction from BNP Paribas SA that the dollar will slide further as nations that  hold the biggest currency reserves seek “safer” assets including gold.

The recent purchase by India’s central bank of 200 metric tons of gold from the IMF may be a sign that global central banks are looking to diversify their assets to protect against further dollar declines. India’s purchase was the biggest central bank purchase of gold in at least 30 years and lifted India to the world’s tenth-largest government holder of gold with 557.7 tons in reserves, according to the World Gold Council.  In April, China’s central bank announced that it had increased its gold reserves to 1,054 tons, up +76%  from 454 tons in 2003. With gold prices up 24% this year and the dollar index down over 6%, more central  banks may be prompted to shy away from the dollar and turn toward the yellow metal.

METALS

GOLD— Dec gold prices extended their year-long rally to a record high of $1,098.50 an ounce. Bullish factors include (1) the purchase of 200 metric tons of gold by India’s central bank, a sign that other central banks may buy gold as the dollar slides, and (2) strong demand for gold as a store of value as the massive  liquidity programs by global central banks may debase their respective currencies and fuel  inflation. A bearish factor is scant inflation pressures after the July CPI fell -2.1% y/y, the biggest y/y  decline since 1950. As of Oct 27, large specs held a large long position of 241,777. The Gold Council reported that global gold demand remained strong in Q2 led by an overall +46% y/y rise in Q2 gold demand to 222 MT, Q2 jewelry consumption fell -22% y/y, Q1 industrial demand fell -21% y/y, and Q2 gold  supply rose +14% y/y to 927 MT. 

COPPER—Dec copper is just below last month’s 1-year high. Bullish factors include (1) the jump in China’s purchasing managers index to an 18-month high along with the expansion of the US Oct ISM manufacturing  index at its fastest pace in 3-1/2 yrs, signaling an improvement in the global economy, and (2) the +29% m/m increase in Sep China copper imports, the first increase since June. Bearish factors  include (1) the unexpected decline in Sep US new home sales, (2) the recent jumps in Shanghai copper  inventories to a 5-1/2 yr high and LME copper inventories to a 5-3/4 month high, signaling slack demand and adequate supply, and (3) ICSG’s prediction of a 368,000 metric ton global copper surplus this year and a 539,000 ton surplus in 2010 as copper consumption slows. Large specs as of Oct 27 added to a small long position of 9,055.

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