Fields of gold: How to harvest profits from market intervention
GOLD has been in the headlines since the start of the year. With the Federal Reserve’s second round of quantitative easing (QE2) in place, gold has acted as the de-facto haven currency. Though attention has been on the seemingly inexorable rise of the yellow metal, commodities have been influenced or even manipulated by the authorities, whether by the Fed, the European Central Bank or the International Energy Authority (IEA).
OIL INTERVENTION
Last week the IEA took the unexpected step of announcing that it would release 60m barrels of oil over the next 30 days. This is only the third time in as many decades that the IEA has implemented such a policy.
The announcement caught many off guard, as they believed that there had been sufficient pressure being exerted by Saudi Arabia on the Opec cartel of oil producers to increase supply in time for the crucial autumn period.
The measures undertaken by the IEA show that they felt that not enough was being done to make up for the shortfall caused by the situation in Libya.
“Interestingly, Brent crude failed to breach the April low of $105.15 on the news and this could indicate that although we will see a lower range over the summer, potentially between $104 and $115,” says Ole S. Hansen, senior manager, Saxo Bank. “We would be surprised to see a revisit of the $100 level. For that to happen we will have to see global economic activity deteriorate even further, something that may just have been halted by this action from the IEA.”
SOFT COMMODITIES
While the large movements seen last week in oil were driven largely by intervention by the IEA, soft commodities in the emerging markets have been strongly driven by the quantitative easing policy pursued by the Fed. The policy has increased global liquidity, and much of that additional liquidity has been channelled into emerging markets (EM) as investors take advantage of borrowing at artificially low interest rates in developed economies and then investing that money in higher yielding EM currencies. As this raises EM currencies, it in turn pushes up commodity prices, as these dollar-denominated goods become more attractive to those purchasing using stronger currencies.
Though Ben Bernanke announced in last week’s Fed press conference that QE2 would be wound up, most market watchers predict a “QE 2.5”, which will have the likely effect of continuing this soft commodity inflation, especially emerging market food inflation, where the effects of western central banking intervention exacerbate rises caused by an inability of supply to keep up with ever increasing demand.
Despite talk of a bubble, gold should continue to benefit from supportive demand. At the same time, oil will continuue to rise and any talk of demand destruction is overblown for the near future at least.