Market Report: Dollar drives commodities down

Nov 20, 2015·Alasdair Macleod

Nov 20th Update

Precious metals drifted lower this week, with gold hitting new lows and silver challenging the low level of $13.96 achieved on 26 August, but so far holding just above it.

Gold has fallen for 23 days in a row, apart from a $1 rally on Monday, leaving it down 9.6% on the year so far, with silver down 8.9%. The bloodbath extends to the whole commodity complex, with crude oil down 14% and copper down 12%. The common feature is dollar strength.

Banks trading in commodity futures nearly always run short positions. This is the same as saying they are always long of US dollars, and the current dollar strength should be regarded in this light. While commodity weakness is signalling falling demand today and the expectation of lower demand in the near future, there is little doubt that the US Fed's stance on interest rates is exaggerating price moves, from the dollar's side. This has led to extremely oversold conditions across the full range of energy and metal markets.

While one can understand the Fed's desire to move interest rates from the zero bound, the action being signalled is at odds with the interest rate policies of all other central banks, and is intensifying the flight into the dollar. This is creating enormous additional strains for the commodity sector, leading to significant bad debt problems, not only for emerging markets and their lenders, but also for the US shale-oil industry.

Estimates of world-wide losses on commodity-related financing are now in the trillions. If we look ahead to the intended rise in the Fed Funds Rate in December, we can see that the Fed is creating a huge headache for the banking system with this intended rise. It is no wonder that the banks are being panicked out of commodities and into the dollar.

Being good Keynesians, the banks and hedge funds make little or no distinction between commodities and gold and silver. In other words, they are dealing in precious metals on the basis they are simply commodities and not money. This adds a further distortion into the mix: the prices of other commodities priced in gold may be falling, somewhat, but not enough to reflect the increasing risk of holding dollars in a bank that typically will have to deal with substantial commodity-related losses before returning customer deposits. It is a fiction that depends on the credibility of fiat currencies, and is becoming somewhat stretched.

Meanwhile, the oversold nature of all commodities suggests a corrective bounce is overdue. This steadied the markets yesterday, and may flow through into the weekend.

Next week

Eurozone: Flash Composite PMI.

US: Flash Manufacturing PMI, Existing Home Sales.


US: Core PCE Price Index, GDP (2nd Est.), S&P Case-Shiller Home Price, Consumer Confidence.

Japan: PPI Services.


Japan: Leading Indicator (Final).

UK: Nationwide House Prices, BBA Mortgage Approvals, UK Autumn Statement.

US: Core PCE price Index, Durable Goods Orders, Initial Claims, Personal Income, Personal Spending, New Home Sales.


Eurozone: M3 Money Supply.

Japan: CPI, Household Spending, Unemployment.


UK: GDP (2nd Est.), Index of Services.

Eurozone: Consumer Sentiment, Business Climate, Industrial Sentiment.


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