SINGAPORE: Commodity markets fell on Monday as oil prices fell sharply due to easing tensions between the US and Iran, while gold and silver fell for a second consecutive session after CME Group announced it would increase margin requirements.
President Donald Trump’s selection of Kevin Warsh as the next Federal Reserve Chairman on Friday triggered a sell-off that sent precious metals sharply lower. Gold and silver had risen 30% and 71%, respectively, to record highs in January before the economic downturn.
U.S. stocks came under early pressure as investors dumped other assets to cover losses in precious metals, but absorbed the blow and finished higher as the dollar strengthened.
Gold fell nearly 4% on Monday after hitting a four-week low, while silver fell nearly 5%. Crude oil fell more than 4%, coming off a multi-month high, and London Metal Exchange copper fell 4%. On Friday, President Trump nominated Warsh, a former Federal Reserve official, to replace central bank chief Jerome Powell in May. This choice triggered a sell-off across financial markets.
Trump’s choice of Warsh overturns the idea that Powell’s successor would push for aggressive monetary easing and strengthen the dollar, making goods more expensive for holders of other currencies and hurting demand.
Mr. Warsh now advocates lower interest rates, but before his time at the Fed he had a reputation as an inflation hawk.
A hawkish Fed has signaled that interest rates will remain high for an extended period of time, supporting the dollar and raising the opportunity cost of owning gold and silver, making them less attractive.
“A stronger dollar is also putting pressure on precious metals and other commodities, including oil and base metals,” said Vivek Dhar, commodity strategist at Commonwealth Bank of Australia.
Selling of precious metals accelerates due to rising profit margins
The decline began on Friday, with spot gold’s biggest single-day drop of more than 9% since 1983, while silver fell 27%, its biggest single-day decline ever. The sell-off in precious metals accelerated as CME Group raised margins on metal futures in the wake of Monday’s market close.
Increases in margin requirements are generally negative for affected contracts, as increased capital expenditures reduce speculative participation, reduce liquidity, and potentially cause traders to exit positions.
“The scale of the unwinding that is occurring in the gold market today is unlike anything I have seen since the dark days of the global financial crisis in 2008,” said IG market analyst Tony Sycamore.
Energy markets came under pressure on Monday from signs of easing tensions between the U.S. and Iran, after milder weather in the U.S. and concerns of a conflict with the OPEC member eased following President Donald Trump’s comments over the weekend that Iran was in “serious talks” with the United States.
These comments, along with reports that Iran’s Revolutionary Guards Navy is not planning live-fire exercises in the Strait of Hormuz, are a sign of détente, Sycamore added.
Copper and iron ore markets faced headwinds due to concerns about high inventories in China, the world’s biggest buyer of industrial and bulk metals, and weak demand ahead of this month’s Lunar New Year holiday.
Analysts say end-user demand and transactions are expected to be weak before the holidays begin on February 15. Among other commodities, Chicago wheat fell 2% as the dollar strengthened. Falling energy prices weighed on corn and soybeans, key ingredients for biofuel production.
“The key question is whether this is the beginning of a structural decline in commodity prices or just a correction,” CBA’s Dahl said.
“We see this as a correction and buying opportunity rather than a fundamental change.” (Reporting by Naveen Thukral, Pratima Desai and Karl Plume; Additional reporting by Ankur Banerjee and Amanda Cooper; Editing by Clarence Fernandez and Joe Bavier; Editing by Franklin Paul)
