Gold Prices Suffer From Contagion Flu

After months of divergence, US WTI and Brent crude spreads are beginning to narrow for different reasons. The premium of Brent has narrowed to just under $10 from last months high of $27 per barrel. West Texas, on the other hand, has rallied aggressively through the $100 psychological barrier to a five month high of $102 on hopes of a quick solution to their ‘oil glut'. Canadian oil company Enbridge will reverse the direction of the ‘Seaway pipeline', opening an outlet for crude from Cushing to the Gulf Coast. In contrast, Brent prices have fallen, undermined by Europe's debt crisis. The commodity has pared some of this sessions gain after the weekly EIA report showed that crude supplies at Cushing rose +890k to +32m last week.

Digging deeper, last week's EIA report showed that crude inventories fell by -1.1m barrels to +337m, and remain in the upper limit of the average range for this time of year. On the other hand, gas stocks rallied by +1m barrels last week, after falling -2.1m in the prior week, and are in the middle of the average range. Oil refinery inputs averaged +14.7m barrels per day during the week, which were +344k barrels per day above the previous week's average as refineries operated at +84.8% of their capacity. For the week, crude oil imports averaged +8.6m barrels per day, down by -53k from the previous week. Distillate supplies (heating oil and diesel), fell -2.14m to +133.7m. Stockpiles were forecast to drop -2.35m barrels.

For the commodity, it has been only one way directional flow of late. Do not be surprised to see investors take some of this premium off the table, believing that the recent strength has come “too far too quickly”.

Gold prices ($1,779) have backed off, suffering from contagion flu. The yellow metal fell just over -1% today, diligently tracking the EUR lower. All of this is on fear that the EU debt crisis is spreading and dragging France into the fray, while Greece and Italy battle to save their economies from imploding. Historically, gold is favored in times of uncertainty, however, the commodity is moving in close correlation with riskier assets recently as investors liquidate some of their commodity holding to finance margin requirements in other accounts. Despite this, on dips there are some good buyers waiting in the wings.

In India, Asia's third largest economy, investors have been dumping bonds, switching asset classes and pouring record amounts into gold. Investors have been seeking shelter from inflation that has held above+9% for the past eleven months. For the rest of us, the market has wanted to own some of the “shiny metal” as a safe haven investment away from market turmoil. Due to European sovereign debt issues, risk aversion trading strategies have tended to dominate of late.

Longer term investors have been using the commodity as a safe-haven alternative to equities or FX. Individuals seem to want to insulate themselves from steeper price falls. The bullion is in its eleventh-year of a bull market and has rallied more than +10.8% since the end of September.

Bigger picture, the commodity has also found support on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. With global sentiment in the fragile category, gold remains the go to “safer-haven” prospect. Retracements and corrections are possible even as the market ties to breach the psychological $1,800 barrier with conviction.

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