Commotion in commodities

The outlook for gold and oil looks shaky as long as the US government shutdown remains in place.

Commodities have the US government shutdown to thank for being returned to the spotlight, but the reasons for the extra attention won’t be of comfort to investors.

Apart from the extreme uncertainty in general created by the shutdown, commodity demand is being damaged. The longer the budget fiasco goes on, the more damage to commodity producers and consumers alike.

The shutdown is causing the risk profiles for commodities to change, yet again. We know the budget shutdown means commodity prices are likely to move lower as uncertainty over the near-term direction of the economy increases.

Gold does not offer an overly compelling outlook. The government shutdown is crimping US growth due to the excessive costs of the gridlock and the temporary layoff of 800,000 individuals. No chance of inflation running away just yet to drive investors to gold.

What will be central to the price of gold is going to be the demand from Asia. The end of the September quarter saw the Shanghai Gold Exchange (SGE) spot price fall from $US40 per ounce to only $US10 per ounce. A falling premium could suggest a drop off in Chinese demand for the shiny metal.

A weaker US dollar hasn’t even been enough to lure the gold bugs. Forget the flight to safety for gold – it doesn’t look like it is coming yet.

Oil could see lower levels from here, but it would be difficult to attribute this to the shutdown alone. Additional oil supply is set to come on to the market as Libya ramps up production after a hiatus. However if concerns about US growth are strong enough, it would be enough to keep oil prices lower for an extended period.

China has been closed for Golden Week, leaving the iron ore price unchanged. When trade resumes next week, the iron ore price could slip from current levels if global growth has become of concern. 

A weaker US dollar does support demand for commodities, but it won’t be enough to offset any immediate price falls.

During the government shutdown the US Commodity Futures Trading Commission won’t publish reports such as Commitment of Traders and the Bank Participation Report. Market participants won’t have information on the world’s largest derivative market about positions of other market players, possibly exacerbating market moves.

Commotion in commodity markets is expected in the short term, even if the long term the fundamentals still remain strong.

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