The dollar strength the past week especially against the Euro is keeping the pressure on commodities.

Friday's Commitment of Traders report showed shorts gaining in gold and oil expecting that the Fed rhetoric this week may gain some tightening bias. I would guess that that the words of the Fed have little merit at this point as smart money feels that the new transparent Fed is as confusing as Greenspan or Bernanke's. The Fed has had windows to act on raising rates which would help confidence as well as net interest margins for financial institutions. But now that election season is the main headline and the Fed does not want to influence the outcome or give the rising dollar more added fuel, I think it will stay the course at least until December. 

Gold hit a low of $1311 early this morning before recovering all of its losses back to $1320 as dollar strength was offset by lower U.S. equity prices. Gold finished Friday at the $1322 level, completing its second consecutive week of declines for the first time in two months. The expiration of the August Comex options tomorrow are a focus with the  only option trading of note is the $1325 calls expiring tomorrow. Otherwise in implied volatility, the 25 delta risk reversal continues to collapse trading at 1% as speculative bets for "lottery ticket" out-of-the-money calls have evaporated and producers continue to hedge production via collars (buying puts/financed by selling calls).

The rest of the week will focus on the follower of the August (GCQ) contract to the December (GCZ) contract as open interest and volume is still around 65/35 toward August. Gold followers should be careful as some tickers have already started publishing December, which is trading $7.5 over August.

Volume in the futures today has been extremely heavy due to the spreads going through actually trading over 30 million ounces by noon. Internationally, the most important event to affect gold is the Bank of Japan meeting on Friday, which may bring additional QE and a rate cut to a more negative rate, possibly -0.3%. I doubt there will be any helicopter money but some kind of fiscal stimulus will be needed. The importance to gold is that the Yen as a safe haven may lessen in importance which will drive more investor flows to gold and gold may benefit whether the yen increases or decreases in value.

The G-20 meeting continued on the IMF path that the global economic recovery continues but is substandard. As I noted above, gold net length declined by 7,031 contracts through July 19 making a two-week decline of over 21,000 contracts. Much of this is due to growth of short bets. Open interest in futures has sunk by 8 million ounces since its peak 10 days ago. Surprisingly, despite the big one day outflow from the GLD SPDR ETF last week, global ETFs added 3,300 ounces with both ETF holdings and the IAU receiving inflows to offset the GLD. At the money implied gold volatility is hovering around 15% from one month through one year. Our GLD position, which expires one month from tomorrow, will have to see some upward momentum in the underlying soon for any kind of payoff.

Silver net length went against the grain and added 6,000 contracts reaching a recent record high of 91,000 contracts (450 million ounces). There has been muted interest in silver options throughout the run up and at the money implied volatility has dropped to 26% from 30% two weeks ago.

The big reversal in net length in copper exploded last week with the Commitment of Traders Report seeing a 13,000 lot inflow (as well as short covering) making total net length 18,000 lots. It may not sound huge but  four weeks ago the net position was short 47,000 contracts. Obviously we will see how much of this change was arbitrage related against the LME when their open interest figures are released tomorrow. The $5,000/ton level is still met with resistance due to producer hedging. Base metal producers like Freeport-McMoRan (FCX) - Get Report should start to show improved results with the copper price at current levels spinning off decent cash flow. In addition, the gold and silver appreciation should be a good contributor to Freeport although most of the appreciation was not seen until June. 

Natural gas was starting to look as if the calendar call spread was working like a charm on Friday's rebound. But despite the warmer weather through the the U.S. the past few days, The calendar call spread is still around 4 cents. So, despite a call for the next 10 days to be cooler than predicted, we will stick with the position. Natural gas rigs dropped by one last week and the injection of 34 billion cubic feet was below forecast so I am looking for the market to tighten going into August. 

Crude oil is getting decimated today on back of the gasoline inventories weighing on the entire liquid complex. Baker Hughes (BHI) rig count rose by 14 last week, making 4 consecutive weeks totaling increase of 41 rigs. The Permian was the biggest growth area with eight rigs restarting. The net effect is that oil broke the $43 level in the active September WTI contract (CLU6). The last time the dollar index (DXY) was at the present level of 97.5, WTI was below $40 a barrel so we may try that support soon. Money managers added their most shorts last week in over a year, pushing the net length in crude to its lowest level since March. To add to the worries of the gasoline glut, OPEC production rose 0.7% in June and Russia said it would increase production by 590,000 barrels per day over the next three years. The one positive development for bulls on the supply side is Libya is having a dispute on opening key ports as the head of the National Oil Committee battles with the government.

It should be interesting to see the Commodity Trading Adviser returns for July as the markets have remained choppy. It is doubtful we will see more index inflows as the GSCI total return index declined by 7% so far in July (including rolls). For the past 12 months the index is down 21.68%, although it is still up about 2% year to date

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.