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Gold at Risk as Dollar Recovers, Crude Oil Supported by Iran Tensions

By , Currency Strategist
22 February 2012 09:55 GMT

Talking Points

  • Crude Oil Likely to Remain Well-Supported on Iran-Linked Tensions
  • Gold, Silver Buoyed by Inflation Bets But US Dollar Gains May Weigh
  • Copper Vulnerable as S&P 500 Futures Point Toward Risk Aversion

Tensions between Western powers and Iran continue to push crude oil prices higher, with the WTI contract touching the highest since May 2011 yesterday. Scanning recent developments, the situation remains volatile. While Tehran has at least delayed (if not cancelled) planned military exercises in the Strait of Hormuz initially slated for this week, it is conducting another set of war games meant to prepare to counter “all possible threats, especially to public, important and nuclear centers,” according to private intelligence firm Stratfor. The exercises are reportedly focusing on surface-to-air missile systems, anti-aircraft artillery, radar systems and warplanes.

This kind of display suggests Iran may be starting to legitimately expect an attack on its nuclear facilities in the near term and could be brandishing an appearance of readiness as a deterrent. While it’s next to impossible to meaningfully predict where the situation will go from here, it seems highly unlikely that tensions will be unwound quickly, meaning a significant geopolitical risk premium will continue to amplify crude prices for some time.

Gold and silver rose sharply yesterday as 3-year US inflation expectations (measured by “breakeven rates”, which are the difference between yields on nominal and inflation-adjusted Treasury bonds) rose to the highest in 9 months, stoking store-of-value demand for precious metals. The outlook for price growth in 3 years – significant because it marks the conclusion of the Fed’s stated period when rates will be held “exceptionally low” – has been marching steadily higher recently.

The move likely reflects US economic data’s broad tendency to surprise higher relative to expectations since October, hinting an accelerating recovery against a backdrop of ultra-loose monetary policy will let loose inflationary pressure. More of the same may be on tap today with US Existing Home Sales expected to print at a 20-month high in January. A stronger US Dollar may act as an offsetting factor however. The greenback rose in European trade as Eurozone PMI figures disappointed, weighing on risk appetite and stocking safe-haven demand for the benchmark currency. S&P 500 stock index futures are trading lower ahead of the opening bell on Wall Street, arguing for more of the same ahead.

Copper also shot higher yesterday after a deal on the second Greek bailout removed the uncertainty that prevented prices from fully capitalizing on a Chinese interest rate cut announced in the previous day. China is the world’s largest copper consumer, so an easing of monetary conditions there that may boost economic activity naturally bodes well for the cycle-sensitive metal. Headwinds from Eurozone PMI figures are being felt today however, and the weakness in US stock futures ahead of the opening bell suggests that will continue into North American trade.

WTI Crude Oil (NY Close): $105.84 // +2.60 // +2.52%

Prices broke resistance at 105.61, the 123.6% Fibonacci extension, with the door now open to challenge the 138.2% level at 106.81. The 105.61 level has been recast as near-term support, with a reversal back below that exposing 103.66 once again.

Gold_at_Risk_as_Dollar_Recovers_Crude_Oil_Supported_by_Iran_Tensions_body_Picture_3.png, Gold at Risk as Dollar Recovers, Crude Oil Supported by Iran Tensions

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1759.13 // +24.18 // +1.39%

Prices pushed higher after putting in a Bullish Engulfing candlestick pattern above support 1714.60, with buyers once again testing resistance at 1763.00. A break above this boundary exposes the November 8 high at 1802.80.

Gold_at_Risk_as_Dollar_Recovers_Crude_Oil_Supported_by_Iran_Tensions_body_Picture_4.png, Gold at Risk as Dollar Recovers, Crude Oil Supported by Iran Tensions

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $34.31 // +0.73 // +2.17%

Prices are testing range resistance at 34.37, the February 2 swing high, with a break higher exposing the October 28 closing high at 35.30. Support remains at 32.60, the 23.6% Fibonacci retracement level. A Bearish Engulfing candlestick pattern completed against a backdrop of negative RSI divergence on February 3 continues to suggest the path of least resistance favors the downside, with a daily close above 34.37 needed to invalidate.

Gold_at_Risk_as_Dollar_Recovers_Crude_Oil_Supported_by_Iran_Tensions_body_Picture_5.png, Gold at Risk as Dollar Recovers, Crude Oil Supported by Iran Tensions

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.836 // +0.128 // +3.45%

Prices pushed higher after putting in an Inverted Hammer candlestick above support at 3.696, the 38.2% Fibonacci retracement level reinforced by a rising trend line set from mid-December. The bulls have cleared initial resistance at 3.789 and now aim to challenge 3.909. The 3.789 level has been recast as near-term support.

Gold_at_Risk_as_Dollar_Recovers_Crude_Oil_Supported_by_Iran_Tensions_body_Picture_6.png, Gold at Risk as Dollar Recovers, Crude Oil Supported by Iran Tensions

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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22 February 2012 09:55 GMT