Tomorrow morning from Jackson hole, Wyoming, the chair of the Federal Reserve, Janet Yellen will give an address that will most likely lay out the position of the Federal Reserve Board for the next 30 days and markets will be taking their clues from her speech. Undoubtedly, this will be a major market mover. If it is hawkish, meaning that a rate hike is strongly on the table for September, equity and precious metal markets will likely sell off, although precious metals have fallen considerably during the past couple of days and are likely discounting a more aggressive stance. We recommend that clients avoid new positions prior to the Federal Reserve address.
WTI crude oil:
October WTI crude oil lost $1.33 on light volume of 991,524 contracts. Volume was below that of August 23 when the October contract gained 69 cents on volume of 1,003,835 contracts and total open interest increased by 9,932. On August 24, total open interest increased by 6,313 contracts, which relative to volume is approximately 65% below average the September contract lost 249 of open interest, October -22,994, which means there were sufficient open interest increases in the forward months to offset the decline in the two delivery months and increase total open interest action. Yesterday’s open interest increase was negative, but was quite light, especially when combined with the lighter than usual volume.
As this report is being compiled on August 25 the October contract is trading 28 cents higher and has made a daily low of 46.42, which is only 3 cents below yesterday’s print of 46.45. Although we think WTI should be traded from the long side, we do not have any specific recommendation.
October natural gas advanced 4.1 cents on volume of 378,267 contracts. Total open interest declined by a massive 15,315 contracts, which relative to volume is approximately 55% above average meaning liquidation was substantial on yesterday’s modest advance. The September contract accounted for a loss at 13,548 contracts. As this report is being compiled on August 25 after the release of the EIA storage report, the October contract is trading 5.9 cents above yesterday’s close and has made a daily high of $2. 901, which is the highest print since 2.921 made on August 4.
Despite the higher move on August 25, October, November and December 2016 natural gas will NOT generate short term buy signals on August 25. However, it appears likely this will occur in tomorrow’s trading. The natural gas market has been trading in a very firm manner even during the correction. The moving average setup is bullish and natural gas is entering its time frame of seasonal strength. Once the buy signals occur, we recommend waiting for a pullback before entering bullish positions. Due to the potential volatility of natural gas, we recommend call options in the December 2016 contract.
The Energy Information Administration announced on August 25 that working gas in storage was 3,350 Bcf as of Friday, August 19, 2016, according to EIA estimates. This represents a net increase of 11 Bcf from the previous week. Stocks were 275 Bcf higher than last year at this time and 350 Bcf above the five-year average of 3,000 Bcf. At 3,350 Bcf, total working gas is above the five-year historical range.
Gold: December gold will generate a short term sell signal on August 25, but will remain on an intermediate term buy signal.
December gold lost $16.40 on volume of 259,942 contracts. Total open interest declined by 7,077 contracts, which relative to volume is average. As this report is being compiled on August 25, the December contract is trading $4.60 lower and has made a daily low of 1321.00, which is the lowest print since 1323.00 made on July 27. As we said in yesterday’s report, both the equity market and precious metals are on hold until the upcoming address on Friday by the chairman of the Federal Reserve.
We think that Ms Yellen will take a somewhat more hawkish stance and by implication this would suggest that a September rate hike is on the table. This will be potentially negative for equities and precious metals and after the address, we will know for certain how much of her position has been discounted by markets. We recommend a stand aside posture, but remain bullish on gold in the intermediate term.
December silver lost 37.7 cents on volume of 105,984 contracts. Volume was the highest since August 22 when the December contract lost 45.1 cents on volume of 129,337 contracts and total open interest declined by 71 contracts, while the September contract lost 13,903 of open interest. As this report is being compiled on August 25, the December contract is trading 5.3 cents below yesterday’s close and has made a daily low of $18.560, which takes out yesterday’s print of 18.635 and is the lowest price since 18.360 made on June 30.
Since topping at $21.250 on July 5, the December contract has fallen approximately 12%. We think this makes silver a relatively better buy than gold and the tendency is for gold to maintain its strength over silver for a period of time and then silver catches up in a dramatic fashion. We recommend using options to trade silver due to its volatility. On August 19, OIA announced that December silver generated a short term sell signal and currently remains on an intermediate term buy signal. For an intermediate term sell signal to occur the daily high must be below OIA’s key pivot point for August 25 of 18.603. Stand aside.