Oil And Gold Rebounded As Liquidation Paused

Oil price's recent decline stabilized Tuesday and recovered by more than $2/bbl from 61.3. Rather that attributing to OPEC's production cut made on Oct 24, we believe the recovery was due to oversold condition after sharp selloffs these few days as well as advance in stock markets. Price was also supported by potential supply disruptions to the US from Mexico. Petroleos Mexicanos closed two of its oil export terminals in the Gulf of Mexico because of heavy rains and wind.

The benchmark contract is not trading at 63.9 and we think the rebound would continue until resistance is found at 69/70 level. Outlook for black gold remains bearish as global economy is far from turning around and how bad the impact will be on oil demand is still unknown. After the rebound, resumption of the decline may bring price lower to 60 and then 50 levels.

OPEC's Secretary-General Abdalla el-Badri said that the cartel may call a meeting earlier than the scheduled date in December if the last cut of 1.5M bpd failed to prevent price dive. As we have been saying, the decision made last Friday marked the beginning of saving-price cycle and OPEC may need another 12 months' production cuts to see the effect.

Asian stocks reversed recent downtrends. The MSCI Asia Pacific Index added 3.6% to 77.92 after slumping 19% in the last 4 days. After becoming the biggest loser, Hong Kong stocks became the biggest winner today with the Hang Seng Index rising 14.35%. In European morning, stocks fought back too. Germany's DAX Index led the rally by adding 8% (more than 10% the highest) after Porsche SE announced raising stake of Volkswagen's, Europe's largest carmaker and the world's biggest company by market value after the deal, shares to 75%. Other indices changed little with FTSE gaining 1.4% and CAC losing 0.4%. Strength in equity markets hurt the Japanese yen which lost ground against the dollar for the first time in 6 days and fell the most in two weeks against the euro.

Gold price's rebound from the low at 681 continued. Currently retreated to at 742.0 after rising to 756.1 earlier, we view gold's movement as a recovery of the fall from 936.3 (Oct 10) and near term upside targets 778.5 and then 808.7. 822.5 (support-turned-resistance and 500Day MA at 825.62) has now become a meaningful resistance to December futures.

In our opinion, the precious metal's rebound these few days reflects investors' risk appetite has been raised slightly. Although traditional wisdom told us gold is a safe-haven and people should rush to it when they are reluctant to risk their capitals, investor behavior changed when they face this global economic recession and financial tsunami not seen in 25 years. Gold investment is ‘too risky' compared with ‘holding cash'. However, we think the risk appetite is just temporary as institutional investors have just liquidated around one-third of their positions. Another round would come soon. That said, we are still holding long term bullish view on gold. (But that's to be seen after the liquidations)

USD weakened as stock markets performed better and other currencies' selloffs were excessive. For instance, pound snapped the losing streak in the past 7 days as investors speculated demand for stock market would spur demand for sterling. Another reason for the dollar's retreat was that the FED would meet tomorrow for rate decision. While a 50 bps cut has already been expected, there's increasing probability that the FED would announce a cut of 75 bps. According to the price of Fed fund futures, the probability has now been raised to 44.4%, up from 33% yesterday.

Economic data are important determinants to FED's decision. Today, we will have consumer confidence for October. Analysts expected the figure to come in at 52, significantly lower than 59.8 in September.