Written by Sumit Roy  |

July 25, 2012

Market Wrap: Gold Spikes To $1610 On QE3 Speculation, NatGas Plunges Ahead Of Inventory Report

Details

With the exception of natural gas, most commodities rose today.

A rare decline in Spanish bond yields and QE3 speculation spurred risk asset prices higher today. The Spanish 10-year bond yield fell by 25 basis points to 7.37 percent after reaching a fresh record of 7.75 percent earlier.

Meanwhile, another disappointing economic data release in the U.S. raised hopes that the Fed may announce QE3 at its next meeting in August. New-home sales in the U.S. plunged 8.4 percent to 350K in June, the largest decline in over a year.

On the positive side, stronger-than-expected corporate earnings announcements in the U.S. lifted investor sentiment. While tech giant Apple missed analyst estimates by a wide margin, on the whole, about 67 percent of companies in the S&P 500 that have reported thus far have beaten estimates.

The U.S. Dollar Index dropped 0.54 percent to 83.55, down from recent two-year highs.

• Gold prices surged today thanks to QE3 speculation and the decline in the dollar. The yellow metal was last trading higher by $26.90, or 1.7 percent, to $1608/oz, while silver gained $0.54, or 2 percent, to $27.50.
  
  Platinum rose by $15, or 1.09 percent, to $1396 and palladium edged up by $3, or 0.53 percent, to $564.
  
  As we wrote in this week's Precious Metals Monitor, "the likelihood of a third round of quantitative easing (QE3) from the Federal Reserve continues to grow as risks to the U.S. economy grow. The labor market and manufacturing sector are already weak; the eurozone crisis is merely another factor that could finally push the central bank to act."
  
  
• Crude oil prices were little changed today after the EIA reported that inventories rose more than expected. U.S. crude oil inventories increased by 2.7 million barrels, gasoline inventories increased by 4.1 million barrels, distillate inventories increased by 1.7 million barrels and total petroleum inventories increased by 10.1 million barrels last week.
  
  Brent was last trading with a gain of $0.27, or 0.26 percent, to $103.69, while WTI fell by $0.12, or 0.14 percent, to $88.38.
  
  "It seems as though all the bad news is priced in, and people are thinking things can't get much worse," said Christopher Bellew, broker at Jefferies Bache. "I think it's more likely that we break above on the upside if there's any more worries about supply disruption in the Middle East or North Sea or positive economic data."
  
  
• Natural gas fell today after a sizzling rally that took prices to the highest levels of the year. Gas was last trading at $3.08, down $0.11, or 3.36 percent, on the session.
  
  Analysts at Morgan Stanley see limited upside for gas from here. From a recent research note:
  
  "There is a trade-off between weather and price-sensitive coal-to-gas switching. At current price levels, gas generation is highly elastic. As prices move above $2.75/mm Btu, coal-to-gas economics erode swiftly, putting total gas generation at risk. Warm weather offers an offset by lifting overall power demand, keeping gas generation relatively constant, even as higher prices push some generation back to coal. That said, so long as some level of switching is required, prices must remain subdued to support incremental gas burn at the expense of coal."
  
  Thursday's report from the EIA may show that natural gas inventories rose by 26 billion cubic feet last week, according to a Reuters survey of analysts.
  
  
• Grains were back on the rise after two sessions of heavy losses. However, forecasts for rains in the U.S. growing regions limited gains.
  
  Corn was last trading up by $0.07, or 0.84 percent, to $7.97/bushel, while soybeans added $0.47, or 2.8 percent, to $16.96 and wheat advanced $0.25, or 2.9 percent, to $9.04.
  
  "Even with these rains, in a lot of areas it could be too little, too late [for corn]", said Christopher Narayanan, head of agricultural commodity research at Societe Generale. "Beans still have another week or two to recover if we get some good rains, because pod filling is just now starting. You have a little bit of time, but not a whole lot."
  
  
• Copper was last trading up by $0.04, or 1.18 percent, to $3.39/lb on Comex.
  
  "Beijing's efforts to stimulate the economy will, in our view, bring growth rates back to highs near 8 percent," said analysts at VTB Capital.