Written by Sumit Roy  |

September 04, 2012

Market Wrap: Gold Hits $1700, Silver Surges After Weak Economic Data Fuels QE3 Hopes, Oil Sags

Details

Most commodities rose, but oil and wheat underperformed.

Commodities mostly rose today after a batch of disappointing economic data fueled hopes that the Federal Reserve will unveil a third round of quantitative easing (QE3) when it makes its next policy decision on Sept. 14.

That ISM manufacturing index fell from 49.8 to 49.6 in August, remaining in contraction territory for a third straight month. Meanwhile, construction spending in the U.S. fell by 0.9 percent in July, well below the expected 0.4 percent increase.

Over the weekend, China said that its manufacturing PMI fell from 50.1 to 49.2 in August, which puts the gauge back in contraction territory below 50. The disappointing reading raises hopes that the Chinese government may provide additional stimulus to reinvigorate growth in the economy.

In Europe, Spanish 10-year bond yields—currently seen as the best gauge of eurozone sovereign debt fears—fell by 28 basis points to 6.57 percent.

The U.S. Dollar Index rose by 0.13 percent to 81.32.

• Gold and silver were higher again today after surging last week on the back of Bernanke's comments that hinted QE3 may be forthcoming at the FOMC's Sept. 14 meeting.
  
  The yellow metal was last trading up by $3.20, or 0.19 percent, to $1695.80 after hitting $1700.30 earlier—the highest level since March 13, while the gray metal rose by $0.24, or 0.75 percent, to $32.34—the best level since April 13.
  
  Platinum advanced $19, or 1.23 percent, to $1564 and palladium rose by $12, or 1.91 percent, to $640.
  
  "For a sustained rally past $1,700, you do need to see definite action from the ECB [at its meeting on Thursday] and a substantially lower dollar," Andrey Kryuchenkov, an analyst at VTB Capital, told Reuters. "The fact that the other precious metals are rallying as well and it's not just gold, shows it is macro sentiment that is driving the market at the moment ... All that promise needs to turn into concrete action. And for gold in the long run, it needs any sort of liquidity boost, of balance sheet expansion and for [bond] yields to stay low."
  
  
• Crude oil underperformed today, as Brent shed $0.34, or 0.3 percent, to $114.23, while WTI lost $1.08, or 1.12 percent, to $95.39.
  
  "The main driver at the moment is the expectation around an ECB announcement on Thursday—investors are looking for some indications of more bond buying," said Filip Petersson, commodity strategist at SEB Commodity Research. They are also looking to see if the U.S. non-farm payrolls on Friday will be bad enough to keep the door open for QE3."
  
  
• Natural gas was last trading up by $0.06, or 1.96 percent, to $2.85/mmbtu. The EIA's latest survey of producers showed that natural gas output fell a modest 180 mmcf/d in June to 72.37 bcf/d. Output levels have yet to show a meaningful decline despite a plunge in drilling activity due to low prices.
  
  
• The grain complex was mixed today, but soybeans briefly hit a fresh record high. Corn was last trading up by $0.02, or 0.22 percent, to $8.04/bushel, while soybeans rose by $0.03, or 0.18 percent, to $17.68 after reaching a new all-time high at $17.95. Wheat shed $0.09, or 0.1 percent, to $8.61.
  
  "We are still pricing in tight soybean supplies going forward," said Victor Thianpiriya, agricultural commodity strategist at ANZ. "Exports from Brazil have dropped sharply, which goes to show that they are running out of beans and it means a lot more demand for U.S. beans."
  
  
• Copper was last trading up by $0.02, or 0.45 percent, to $3.47/lb amid the broad-based rally in commodities. While the aforementioned weak reading on China manufacturing is bearish, many traders believe that the government will step in and provide stimulus in the coming weeks and months.
  
  "With copper breaking above its 100-day moving average yesterday, it remains key that the metal does not give up too much today; otherwise, we may see the shorts look to take advantage of the poor manufacturing data of late," RBC said in a research note.