Gold Collapses; Oil Hits 3-Month Low
Dailyfx | Jul 21, 2015 05:12AM ET
Talking Points
- The PowerShares DB Commodity Tracking (ARCA:DBC) hit a series’ low Monday as S&P 500 stood just off a record
- Gold suffered its biggest jolt since December 1 on a sharp drop to five-year lows
- Oil prices have slid to three-month lows
It used to be that commodities represented one of the venues that risk-minded traders will take when they were bidding higher returns – particularly in risk-positive conditions. However, we are seeing clear evidence that this particular asset class has lost a lot of its clout as a speculative favorite from metals to energy to ‘softs’.
The biggest move to start the week – and arguable one of the biggest in months – was the dramatic tumble from gold. The metal nearly 3.4 percent on the day Monday and as much as 5.5 percent through the session’s low. This drop occurred through the opening move of the Asian session as a large move in China seemed to leverage the illiquidity of the opening session. As can be seen below, total volume on the day was relatively low and the CBOE’s volume index for the metal were restrained though the commodity still hit a five year low.
Looking at retail positioning, the drop from the precious metal lead to a sharp drop in long speculative positions. From a position of more than four times the long-to-shorts taken, the ratio declined to just over two.
Gold wasn’t the only commodity effected on the day however. The broader asset class would slide Monday, and a notable loser was oil and energy. Oil prices didn’t show the same level of intensity as gold in its own decline, but US-based WTI would still drop to a three-month low. Once again, the CBOE’s tailored volatility measure didn’t seem to fully encompass the level the underlying market would drop to.
Get The News You Want
Taking a look at the broader, commodity asset class; we find a clear divergence from the performance of a more attuned ‘risk benchmark’ – the S&P 500. While the benchmark index was unable to secure a new record high through the past session (the 41st trading session without a record for the longest drought since February 2013), it was nevertheless in firm control of the bulls. Meanwhile, the Powershares Deutsche Bank Commodity Index dropped on the day. This particular measure hit a series low (back to 2006) while Bloomberg’s own commodity index hit its lowest level since 2002.
Commodities have played a role over the years as a ‘risk asset’. That bearing has significantly weakened however over the past months and years (as can be seen in the chart below). This is not something unique to this asset class but rather is a reflection of diminished conviction in investor confidence itself. While some benchmarks continue to press higher, they are increasingly unique players. If speculative appetite is not a universal motivator, it is more likely to falter altogether. In the meantime, the weaker players in the spectrum will falter first.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.