Commodity Momentum And The Implications Of The Us Shutdown

 | Oct 02, 2013 08:46AM ET

As the US government shutdown enters its second full day, commodity markets are trying to come to terms with the potential near-term impact on growth and subsequent demand. A prolonged and drawn out closure of key government functions carries the risk of negatively impacting US growth prospects which in turn could spread to other key economies. On that basis, it has not been a major surprise to see growth dependent commodities such as energy and industrial metals reacting negatively to the shutdown.

Precious metal selloff
The reaction to the news in precious metals, especially gold, has been more difficult to explain as the selloff yesterday went against the supportive news such as the weaker dollar and potential weaker growth that could lead to an extension rather than a reduction in quantitative easing. In the end, the move was driven by short-term traders who had been crowding into the long side in anticipation of further gains. Hedge funds had also been buyers of gold over the past couple of weeks and much that buying was initiated above 1,310 USD/oz which left the downside exposed on a potential break below that level.

The selloff was kicked off by copper which reacted to the negative growth potential and this then spread to silver and eventually gold. Once 1,310 USD/oz was broken the floodgates opened and a scramble to reduce exposure followed. Key support for gold at 1,277 USD/oz was tested during Asian hours and it has so far managed to hold thereby attracting new buying.

The outlook for gold continue to be very shaky considering the reaction to the relatively gold friendly news over the past couple of days. A US slowdown, if prolonged, will support but as long equity markets maintain their calm approach, no need for safe-haven buying exists. Gold is back in a downtrend, currently in a 1,257-1,347 USD/oz range and has maintained negative momentum for the past 16 days.