Gold, Copper Prices Boosted by Weaker Dollar Ahead of Wednesday’s CPI Report

Commodities and commodity-linked currencies put in mixed performances on Tuesday as investors tried to figure out how to play strengthening U.S. Treasury yields and stock market volatility. A weaker U.S. Dollar also played a role in yesterday’s price action as well as position-squaring ahead of Wednesday’s U.S. consumer inflation report.

Copper

A weaker U.S. Dollar was one factor that drove dollar-denominated March Comex High Grade Copper futures sharply higher on Tuesday. The weaker dollar made copper a more attractive asset for foreign buyers.

A strong performance in base metals for a second session and a rebound in U.S. equity prices for a third session also led to increased demand for copper. The price action also suggests that the shake-out from last week may have run its course driven by dip buying, or bottom-picking.

The rally was strong on Tuesday, but the trend did not turn up on the move. The market is still vulnerable to periodic bouts of selling pressure, which means we may see a rangebound trade, or two-sided price action in anticipation of thin-trading conditions ahead of the Chinese Lunar New Year which begins on Thursday and runs until February 21.

Gold

Gold futures finished higher for a second day as the dollar weakened on Tuesday. The market has also nearly recovered all of last week’s loss. Despite the positive price action, the trend is still down. The market is also lower for the month.

Gold showed limited upside reaction last week to the volatility in the stock and bond markets, perhaps because investors viewed the weakness in the equities markets as a “healthy” correction due to overvalued stocks.

However, the presence of volatility and the uncertainty ahead of Wednesday’s U.S. consumer inflation report may be driving investors into the safety of gold, the Japanese Yen and the Swiss Franc.

In addition to the weaker dollar, the yield on 10-year Treasury notes slipped to 2.846%. The yield during Monday’s session climbed to a four-year high of 2.891% before settling at 2.857%.

Additionally, a downtrend combined with the counter-trend rally may be an indication that the buying in gold is actually hedge protection against a further weakness in the stock market. Uncertainty ahead of Wednesday’s U.S. consumer inflation report could also be underpinning gold.

Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures settled mixed on Tuesday, supported by a weaker U.S. Dollar, which led to increased demand for the dollar-denominated commodity. Gains were limited, however, and the markets pressured by concerns over supply.

In other news, the Paris-based International Energy Agency said global oil supply would outstrip demand this year, prompting fears that efforts to reduce inventories would fall short of expectations.

Natural Gas

Short-covering and position-squaring ahead of Thursday’s U.S. Energy Information Administration’s weekly storage report helped boost natural gas prices on Tuesday. Prices were also underpinned by profit-taking following a prolonged move down in terms of price and time. The inability to take out the December bottom may have also encouraged short-sellers to slash positions.

Last week’s cooler temperatures may have contributed to a 20% week-on-week boost in consumption in the residential and commercial sectors that contributed to a 13% increase in total U.S. natural gas consumption, the EIA’s latest Natural Gas Weekly Update showed. However, with warm weather returning to several key demand areas, renewed demand weakness in the weeks ahead is likely to slow the rate of inventory withdrawals. This could limit the market’s short-covering gains.