Crude oil prices, which had been holding their recent gains, fell sharply this morning after record high U.S. petroleum inventories were announced. Brent crude and WTI crude gave up over 4% and 5%, respectively, in early morning trading. Wall Street opened lower despite a drop in jobless claims that shows the labor market is firming up. European shares were mixed this morning with no resolution yet in the Greek conundrum, but most experts remain convinced that a deal will be struck in the near future. Sentiment in Europe is also being hurt by the continuous flow of news implicating the continent's biggest banks in aiding tax evaders and laundering illicit money. Though gold was moving higher this morning--at least in the paper markets--platinum continued to slide, falling as low as $1,170/oz, nearly $40 off of the spot gold price.
Yesterday in the Markets
After opening about $10 in the red, momentarily slipping below the important $1,200/oz mark, gold managed to peek into the green by the day's end. Stocks performed similarly, dropping in the morning before rebounding after the FOMC minutes proved dovish, returning to about unchanged at the closing bell. The Nasdaq advanced above 4,900 while the S&P 500 was flat at 2,100. The Dow Jones lagged behind, losing almost 0.5%. The dollar slipped around midday before moving back above 94.0 on the DXY index.
Factors Affecting Gold Today
Jobless claims came in well below analysts' expectations this morning, dropping 21,000 from last week to 283,000. While the improving labor market should be a good sign for consumer confidence as well as consumer spending, with less people out of a job, it also coincides with faster payrolls gains, as 2014 proved to be the best year for new hires in the U.S. since 1999. In fact, the last three months of job gains (averaging over 335,000 payroll additions per month) have been the strongest quarterly performance since the winter season of 1997.
Economic data released this morning also showed petroleum inventories at record highs. Crude prices drop sharply in response, reversing their recent rally. Although they eased back from this morning's plunge, the global crude benchmarks were each well off from the beginning of the week, with Brent crude testing the $58/bbl level and WTI sinking below $50/bbl. While the current oversupply is still keeping a cap on oil prices, we may see energy shares bounce back due to an array of bullish factors arising, such as the closing of many shale oil operations. The fastest-growing U.S. shale producer, EOG Resources, is halting expansion of its operations. This logically means that, if the largest American player in the industry is cutting production, then that spells bad news for more marginal producers.
In the mining sector, the world's biggest gold producer, Barrick Gold, reported better-than-expected earnings of $174 million last year; the company plans to reduce its net debt by at least $3 billion through asset sales and lower its administration costs. Barrick also expects to produce 6.2 to 6.6 million ounces of gold (~205 tonnes) in 2015 at a cost of $860-$895 per oz. Last year, the company's output was 6.25M ounces of gold at $864/oz. Junior mining companies, however, often need stronger gold prices in order to remain profitable, as it may cost them as much as $1,000 per oz or more to get gold out of the ground.
ECB transcripts show that sovereign debt purchases only measure big enough in the judgment of policy makers. Obviously, this determination has particularly strong implications for Greece, which currently cannot use its government bonds as collateral for a bridge loan from the central bank, pursuant to the tenets of the country's bailout agreement. Nonetheless, the ECB approved a €3.3 billion increase in emergency liquidity for Greek banks on Wednesday. Greece seems to want the disbursement of funds with no austerity strings attached, a position that Germany has adamantly opposed.
In Asia, the Nikkei 225 rose to highest level since May 2000 on the news that Japanese exports surged 17% year-over-year in January. This is perhaps a sign that Japan is finally moving out of its prolonged recession, although similar blips of good news have come from the Pacific island over the last year or so, but could not be sustained. Asian shares were up almost across the board. Meanwhile, both Japan and China--the two largest holders of U.S. debt--cut their respective holdings of U.S. liabilities by several billion dollars, although both countries still hold about $1.2 trillion in U.S. debt.
An interesting legislative note: the Arizona House has again passed a law to stop state capital gains tax on precious metals, asserting that gold, silver, and platinum coins are indeed legal tender. State sales taxes will still be applied on bullion purchases, however. A similar measure was passed in Arizona in 2013, modeled after a measure passed in nearby Utah, but this bill was vetoed by Arizona governor Jan Brewer. If the current legislation is approved, it would be a strong statement about how precious metal money can protect the public from the volatile fluctuations in the dollar and other dollar-denominated commodities.
Tomorrow's PMI Manufacturing Index Flash will give a snapshot of factory output and prices, and the Atlanta Fed Business Inflation Expectations report should shed light on where producers expect inflation to be in the medium- and long-term.