The Global Macro Digest (R): Weekly Newsletter For May 22, 2016

ENERGY AND PRECIOUS METALS TAKE A BLOW

The Federal Reserve: This past week most equity markets in the U.S. rose slightly. The Dow Jones Industrial Average closed the week at 17,500.94, a loss of .20%; the S&P 500 closed at 2,052.32, a gain of .28%; and the NASDAQ rose 1.10% to close at 4,769.56. The Dow Jones Transportation Index rallied most impressively, with a gain of 2.19%, closing at 7,671.89.

Wednesday was a pivotal day for both oil and precious metals. On Wednesday minutes of the Federal Reserve April meeting were made public. These minutes were widely interpreted to mean that an increase in Fed rates is likely to happen in June.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2 percent objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June,” the minutes said.

“Participants generally agreed that the risks to the economic outlook posed by global economic and financial developments had receded over the intermeeting period,” the minutes said Wednesday. “Many participants judged that labor market conditions had reached or were quite close to those consistent with their interpretation of the committee’s objective of maximum employment.”

Although the Fed minutes did leave the Fed some room to maneuver, the indications were the strongest yet that the Fed is inclined to raise interest rates in June.

Oil Prices: There is no scarcity of opinions about the next direction for oil prices. One can find an opinion – and a fairly authoritative opinion at that – to support a continuing strong recovery for oil prices, or an imminent collapse.

The better arguments for higher prices are that lower prices have forced U.S. producers to deactivate many oil rigs. Also, in several turbulent areas of the world, such as Nigeria, oil production has been taken greatly reduced by violent insurrections. These factors have resulted in a sharp decline in production.

The better arguments for lower prices are that any decline in production in the U.S. or elsewhere is quickly being replaced by increased supplies from Libya, Russia, Iran and, most important, Saudi Arabia. Furthermore, there remains a huge backlog of oil in storage that will take many months to absorb.

The Dollar: The news discussed above that the Federal Reserve apparently intends to raise interest rates in the near future caused the U.S. dollar to rise strongly this week. Beginning with the release of the Fed minutes on Wednesday, the dollar gained ground against every major currency except the British pound. The U. S. Dollar Index rose .73% on the week.

As you can easily see from the chart below, the effect on commodity prices was immediate. A strengthening of the dollar led quickly to a decline in gold and oil prices.

U.S. Dollar Index              COMEX gold       Brent Crude Oil

Monday (5/16):                                –  .02%                                  .12%                                  2.57%

Tuesdays (5/17):                                 .01%                                  .16%                                  .57%

Wednesday (5/18):                            .66%                                –   .58%                                  – .85%

Thursday (5/19):                                   .13%                                – 1.54%                                –  .25%

Friday (5/20):                                      – .04%                                –   .15%                                 –  .14%

The weekly change for Brent Crude Oil was a net gain of 1.88% despite falling prices on Wednesday, Thursday and Friday. And for COMEX Gold there was a net decline of 1.56% for the week.

If you believe that a further decline in oil prices is imminent, you might want to consider the following inverse exchange traded funds (ETFs) that would benefit from falling oil prices.

DTO Crude Oil Double Short

DWTI Inverse Crude 3x

SCO Ultrashort Crude

DNO U.S. Short Oil

Mining Companies Gains/Losses for Week Ending May 20, 2016: All but one of the mining companies that we follow lost ground this week.

Closing Price                       Weekly Change

 

Randgold Resources (GOLD)                       89.32                                     1.11%

Goldcorp (GG)                                                   17.37                                   – 3.29%

Franco-Nevada Corp (FNV)                          65.52                                      – 3.28%

Agnico Eagle Mines (AEM)                           46.18                                    –     .04%

Newcrest Mining (NCMGY)                         14.30                                     –   5.36%

Newmont Mining (NEM)                                 33.73                                     –     1.00%

Barrick Gold (ABX)                                              18.20                                     –    1.14%

Eldorado Gold (EGO)                                            4.51                     –     7.39%

New Gold (NGD)                                                    4.21                     –     7.06%

The Global Macro Digest®

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