Written by Sumit Roy  |

January 27, 2012

Week In Review: Gold & Silver Surge To Continue After Breakout, NatGas Bottom May Be In

Details

We examine the latest developments in commodity markets and the week’s performance.

Commodities surged this week amid dovish comments from the U.S. central bank. Perceived inflation risks increased and investors turned to the asset class that is seen as benefiting most in an inflationary environment. Stocks remained near six-month highs, but they underperformed. The S&P 500 closed out the week essentially unchanged near 1315.

Macroeconomic Highlights

The Federal Reserve provided a shot in the arm to commodities on Wednesday after it pledged to keep its benchmark overnight interest rates close to zero until late 2014. Previously, the Fed had committed to keeping rates low until mid-2013, and most analysts had anticipated that the wording would be changed to sometime in 2014.

Meanwhile, the United States economy expanded by 2.8 percent annualized in the fourth quarter, slightly less than the 3 percent that was expected. That is still a fairly solid showing and a rate that would be supportive of commodities if it were to be maintained.

Commodity Wrap

• Natural gas was the best performer of the week, as prices finally rebounded after free-falling for weeks. We wrote extensively about the outlook for the fuel in our latest natural gas report. Suffice it to say, the fundamentals for gas remain dismal, but a short-term bottom may have been put in near 10-year lows at $2.23 earlier this week.

Prices have since rebounded above $2.50. In 2009, prices bottomed out near $2.40, when the fuel was facing a similar bearish environment. At these levels, natural gas becomes much more competitive with coal, and producers begin to shut-in production, as we saw Chesapeake Energy do earlier this week.

The potential for sub-$2 prices will increase in the fall when storage typically maxes out, but until then, we would anticipate choppy, volatile trading action.

• Wheat took the No. 2 spot this week, while the other grains — corn and soybeans — also saw solid gains. Rumors of export-curbs in Russia and Argentina lent support. The grain, however, remains mired in a downtrend and will need to break the area near $6.75/bushel before there is any change in the outlook. Support lies near $5.70.

For corn, the outlook is neutral. The grain is range-bound between $5.75 and $6.55.