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Markets to Monitor: Gold, Crude Oil, and the U.S. Dollar

Quite frankly, quit looking out your backdoor. You’ve heard it plenty throughout the years. There’s more to the price of corn, beans, and wheat than the yield out in your fields. Producers understand this now that the agricultural world is indeed a global marketplace. Price fluctuations for grain are not hinged on your backyard yields. Instead, they are based on yields across the world and demand.

Let’s take it one step further; time to grow and stretch some more. Rather than solely looking at global supply and demand, we need to also look at other outside market factors that influence grain prices. These factors have been a little sleepy over the past few years, as most commodities, in general, have struggled in terms of price rallies. In 2018, we need to be aware of outside markets, as they may likely start to awake. Here are three outside markets I’m watching closely as 2017 comes to a close.

Crude Oil (and Chinese Demand)

Low prices cure low prices. Crude oil prices have been stuck in a relatively tight price range for three years. Does that sound like any other commodity you know? Abundant global supply has kept prices on the defensive. Stepping back, crude oil futures have had trouble climbing much beyond $55 per barrel over the past couple of years. Yet, on price setbacks, it finds sufficient price support at the mid $40 price level. Recent price gains have come due to short-term renewed demand from U.S. refiners. They are now resuming operations after shutdowns due to Hurricane Harvey. Also supportive are ideas that OPEC members may continue to comply with production cuts. In China, demand continues to grow. According to Reuters, China is currently the world’s largest importer of oil, and some 212.4 million tons has been brought in through the first half of 2017!

Speaking of China, quite recently it announced the creation of an oil futures contract (open to international traders) that will be denominated in yuan and convertible to gold. Why should you take note? To many, it seems, this move replicates ideas that China continues to create a pathway leading to a global economic system not fully dependent on the U.S. dollar. This move provides the first official linkage of oil to gold and, more importantly, a linkage between the Chinese currency and gold. Gold is still viewed by many around the world as a tradeable asset for goods should global currencies falter. Just keep an eye on that crude oil. If prices can break through overhead resistance levels on charts, the upside points to $70 per barrel. Oftentimes, if crude oil can rally, then corn follows higher, as well. Remember, one third of the value of corn is directly tied to ethanol.

The Role that Gold Futures Play

Think back to a few hundred years ago before paper currency. The world used gold, gold coins, gold anything as a means for currency in trade. With the advent of paper currency, gold is still used as a means to back some currencies yet today. Gold is also a tradeable futures commodity, which often invites euphoric buying when people lose confidence in governments and paper money Investors view the purchase of gold as a safe haven. With all of the potential geopolitical drama in the world that can erupt in a moment’s notice, gold will continue to be the go-to buy. Gold prices, like many commodities, have been trading in a sideways pattern for a few years. Which way the breakout happens is based on many factors. One thing seems certain: If gold is rallying, odds are other commodities will too.

The U.S. Dollar

Since January, the U.S. Dollar Index has trended lower. At its pinnacle, the dollar was up near 103.00 with a recent early September low of 90.79. That nine-month down trend seems to be at a point where a correction to the upside seems likely. The dollar has risen in recent weeks and started to inch higher. Investors are growing more optimistic about the likelihood for tax cuts and U.S. interest rates to increase. Some anticipate this might boost the U.S. economy. There is a feeling that the economy is improving (citing the proposed tax reform plan which would offer tax cuts to U.S. businesses), and the value of the dollar seems to have bottomed for now. A corrective bounce to the upside seems likely, yet doubtful that we retest the January highs. Remember, when the U.S. dollar is lower, it makes it cheaper for other countries to import our commodities due to the currency exchange rate. Watching the value of the dollar is so important as we continue to monitor export demand of agricultural commodities. We want those exports to continue staying strong!

This could be a year where multiple factors and fundamentals (not just yield!) pave the way for price potentials. Knowing and understanding the importance of outside market information helps you to be aware for the price scenarios that could unfold in 2018. Make sure to keep an eye on crude oil, gold, and the U.S. dollar.

If you have questions, you can reach Naomi Blohm at nblohm@stewart-peterson.com.

 

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2017 Stewart-Peterson Inc. All rights reserved.

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