Revised tapering outlook pressures oil and gold

Commodity prices have slid today to multi-month lows, as strong supplies coincides with renewed concerns that a cut in Fed stimulus may curb demand.

There has been a broad drop in commodity prices today, with coffee in an extended trough, cotton near lows for the year and oil dropping below $95 a barrel for the first time in over four months.

US light crude oil futures were trading down 1.36% late in the New York trading session at $95.03 a barrel. This leaves oil on course for its fourth weekly decline in a row, the longest such run in over a year.

Gold benefitted from the budgetary wrangles in Washington last month, bouncing off lows mid-month to rise 8% in the wake of the shutdown as investors speculated that the Fed might extend tapering deep into 2014.

Economic data has begun to pick up since then, however, with yesterday’s Chicago PMI coming in far above expectations and today’s ISM manufacturing index suggesting expansion is accelerating.

The FOMC statement on Wednesday failed to make much of the government shutdown, and appeared similar to the statement in September, which was issued before the Washington impasse came to a head. By leaving the possibility of a taper wide-open and effectively downplaying the effect of fiscal policy on growth, the Fed has come across as less dovish than many had expected.

Coupled with the signs of economic improvement, this has caused the time-frame for tapering expectations to shorten, and this is weighing on gold. The price of spot gold fell 0.76% to $1312.5 per troy ounce by late in the trading day.

Expectations for a reduction in stimulus being brought closer also does not bode well for energy demand. Government data earlier this week showed US crude inventories rising once again, with domestic supply now threatening to pull ahead of demand.

The strength of the dollar has not helped either gold or oil, both of which are denominated in the currency, making them more expensive to global investors when the dollar rises. EUR/USD is down 0.8% today.

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