DUBAI: The dollar continued its ascent and against the euro and touched its highest level since April. Traders both speculative and real money have been slow in jumping back on the long dollar train. However, speculation about additional stimulus being announced by the European Central Bank in addition to the expected US rate hike on Dec. 16, mean a continued rally into year-end seems increasingly likely, according to a report prepared by SAXO Bank. 

Industrial metals received boost on news that the China nonferrous Metals Industry Association had asked the government to help prop up prices and to investigate a recent sharp increase in short selling of metals on the Shanghai Futures Exchange. The impact of such initiatives will probably prove limited as long the root causes of the weakness remain. These are declining demand, not least from China (the world's largest consumer), and a lack of production cutbacks by miners.

The energy sector was mixed with gasoline rallying on strong demand while natural gas was heading for its biggest weekly decline since June. The weakness was driven by the 34th straight weekly rise in inventories as mild weather across the US north east continues to delay the beginning of the winter extraction period. 

WTI crude oil has settled into a $40 to $44 range with supply news continuing to limit the upside for now. US weekly inventories rose for a ninth straight week while Libya's attempt to reopen two of its biggest fields could lead to a doubling of its current production to 800,000 barrels per day. 

Money managers have accumulated a record short futures position in Brent and WTI crude and, just like when this last happened back in August, the shorts have helped put the brakes on the selloff with positions now already geared toward lower prices. In August, the similar sharp rise in bearish bets helped trigger a 25 percent rally in just three days and with this in mind the selling has now slowed despite news from the market continuing to be non-supportive. 

Crunch summit in Vienna

On Friday OPEC met in Vienna for the first time since October (when they held a technical meeting) and multiple issues were to be discussed on and off the official agenda. Since October the price of OPEC's crude oil basket has fallen by another 10 percent to the lowest since the 2009 recession. 

Non-OPEC supply, meanwhile, remains stubbornly high with US production having plateaued above 9 million barrels per day. A continued drop in the number of oil rigs operating across the US should however provide some comfort in the belief that additional production cuts will be seen during the coming months. 

US oil production has stabilized but the continued drop in number of oil rigs should eventually trigger a renewed decline

The value of OPEC's daily production has slumped by $2 billion per day compared with the average seen between 2011 and 2014. So while OPEC can claim success in terms of stimulating global demand the negative economic impact on its members has been tremendous. 

Dollar and FOMC focus

sending gold lower

With US interest rates poised to rise, the dollar seemingly on an endless journey higher and most global commodities plumbing multi-year depths, it's no wonder that gold, too, is in trouble. Even the latest spike in geopolitical tensions over Turkey's downing of a Russian jet has failed to invigorate the metal, a traditional refuge in troubled times.

Gold's lost shine is dramatically illustrated by the current state of the market which has seen an exceptionally sharp fall in longs. Right now Comex gold futures are net short by 9,000 lots (900,000 ounces) — nearly as low as back in late July when the market was short of 11,300 lots.

The magnitude of gold's fall from grace is one thing but what's really remarkable is the speed at which it occurred: as recently as late October there were longs of 121,000 lots (12.1 million ounces).

In other words, the reversal was both sizable and sudden, occurring as it did inside three weeks and that's one of the most aggressive reversals we have seen in a long time. 

Gold traders have by now fully priced in a US rate hike in December but what the market hasn't yet worked into the price is the impact higher rates will have on the dollar. Both speculative and real money investors have been slow in re-building sizable dollar longs and that could see the greenback strengthen further during the coming weeks. 

Gold may well remain under pressure until the Federal Reserve Open Market Committee meeting on Dec. 16. So while gold may finish the year close to $1,100/oz the real test will be during the first quarter of next year. Ahead of the FOMC meeting we could see gold trade in a range between $1,040– $1,090/oz in December. On a three to six month perspective it might drop as low as $1,000/oz before clawing its way back towards $1,250/oz by the end of next year.