La Niña is coming: Here’s what it means for commodity markets

La Niña is coming. Hot on the heels of a record setting El Niño, another potentially strong weather phenomenon with very different characteristics could emerge later in 2016.

A consensus of longer-range computer models now show La Niña conditions emerging by around July, and should peak this winter at a moderate intensity. Strong El Niños are much more likely to be followed by a La Niña. The three strongest El Niños on record — in 1972, 1982 and 1997 — all transformed into La Niñas. In the video below the US National Oceanic and Atmospheric Administration explain what’s about to happen.

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Change in investor sentiment could see oil falling back to the low $30’s

A change in investor sentiment could easily result in oil prices falling back to the low $30’s per barrel. That’s the view of Barclays who highlight that net positions from money managers (e.g. hedge funds and other speculators) in crude are approaching bullish extremes, a position from where sentiment has reversed very rapidly over the past couple years (figure 1). If sentiment does change quickly and this is reflected in money managed positions then this could imply that WTI crude futures prices fall back close to $30 per barrel (figure 2).

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Gold prices: The top 10 most important drivers

1) US Dollar

Like most internationally traded commodities gold is priced in US dollars. At its most basic a decrease in the value of the US dollar relative to a commodity buyer’s currency means that the purchaser will need to spend less of their own currency to buy a given amount of the commodity. As the commodity becomes less expensive demand for the commodity rises, resulting in an increase in the price and vice versa.

The value of gold, a fiat commodity currency, will also be largely determined by its attractiveness relative to other fiat currencies – the fiat paper currencies issued by central banks. Gold will be most attractive when market participants are most nervous about the future value of other fiat currencies. And concern among investors tends to grow when governments appear to be spending too much (ie, increasing the size of their budget deficit) and/or when central banks do not do enough to contain rising prices. Inflation, of course, acts to erode the purchasing value of currency.

Gold prices have a relatively high inverse correlation against the dollar of around -0.35.

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