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Crude Oil, Gold and Silver Sold as Looming QE2 Expiry Fuels Risk Aversion

Crude Oil, Gold and Silver Sold as Looming QE2 Expiry Fuels Risk Aversion

2011-05-12 10:11:00
Ilya Spivak, Sr. Currency Strategist

Commodities – Energy

Crude Oil Tumbles on Renewed Risk Aversion

WTI Crude Oil (NY Close): $98.21 // -5.67 // -5.46%

Prices reversed sharply lower from resistance at $104.73, the 50% Fibonacci retracement of the drop from the May 2 high. Support at $94.65 – the May 6 low – is now in sight, with a break below that exposing $92.98. Near-term resistance stands at $99.41, the 23.6% retracement level.

It appears the unwinding of QE2-linked positioning across the asset spectrum has resumed as expected, with the prospect of higher US yields and their implications for global growth compounded by fears that China will step up efforts to push its borrowing costs higher after yesterday’s CPI report put inflation well above 4 percent, the government’s 2011 target. On balance, China’s inflation rate has averaged 5.13 percent so far this year; that means that for the remaining 8 months, it has to average a meager 2.87 percent to achieve the 4 percent target, hinting an aggressive tightening campaign is ahead.

Stock index futures tracking the S&P 500 – the go-to benchmark for overall risk sentiment – are firmly in negative territory ahead of the opening bell on Wall Street, hinting continued losses area ahead. US Retail Sales and PPI figures headline the economic calendar.

Crude_Oil_GOld_and_Silver_Sold_as_Looming_QE2_Expiry_Fuels_Risk_Aversion_body_Picture_10.png, Crude Oil, Gold and Silver Sold as Looming QE2 Expiry Fuels Risk Aversion

Commodities – Metals

Sentiment Trends Sink Gold, Silver

Spot Gold (NY Close): $1501.20 // -15.08 // -0.99%

Gold has reversed course lower from resistance at $1519.55, the 50% Fibonacci retracement of the drop from the May 2 high. Prices are now testing through support at $1489.19, the 23.6% retracement level, with a break below that exposing a trend-defining trend line that has held up prices since late January. Piercing the latter barrier would amount to a material, medium-term trend change, opening the door for protracted gold weakness over the coming weeks.

As with oil, gold has fallen victim to the renewed unwinding of QE2-linked positions as ever forward-looking markets prepare for the evaporation of cheap US Dollar funding that has fueled much of the rally across the risky asset spectrum when the Fed allows the controversial program to expire in June. Indeed, the correlation between the yellow metal and the S&P 500 remains at the highest in six months. With stock index futures off by 0.6 percent ahead of the opening bell on Wall Street, more of the same is seems likely ahead.

Crude_Oil_GOld_and_Silver_Sold_as_Looming_QE2_Expiry_Fuels_Risk_Aversion_body_Picture_13.png, Crude Oil, Gold and Silver Sold as Looming QE2 Expiry Fuels Risk Aversion

Spot Silver (NY Close): $35.18 // -3.33 // -8.64%

Prices reversed lower from resistance at $39.45, the 38.2% Fibonacci retracement of the 4/25-5/6 decline, and are now probing past the May 6 low at $33.06. A break below this juncture clears the way for deeper losses to challenge resistance-turned-support at $31.24.

As another QE2 beneficiary, silver has followed gold to develop an increasingly significant correlation with the S&P 500. The directional link between the two metals remains iron-clad, hinting they will continue to move in tandem, pointing to continued weakness as risk aversion returns in force.

Crude_Oil_GOld_and_Silver_Sold_as_Looming_QE2_Expiry_Fuels_Risk_Aversion_body_Picture_16.png, Crude Oil, Gold and Silver Sold as Looming QE2 Expiry Fuels Risk Aversion

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