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Crude Oil, Gold Vulnerable as US CPI Threatens to Rekindle Risk Aversion

Crude Oil, Gold Vulnerable as US CPI Threatens to Rekindle Risk Aversion

2011-05-13 11:21:00
Ilya Spivak, Sr. Currency Strategist

Commodities – Energy

Crude Oil to Fall if US CPI Undermines Risk Appetite

WTI Crude Oil (NY Close): $98.97 // +0.76 // +0.77%

Positioning is little changed from yesterday, with prices caught between the 23.6%Fibonacci retracement of the drop from the May 2 high at $99.41 and the May 6 low at $94.65. A period of consolidation near current levels seems reasonable after last week’s intense decline, with anything shy of a daily close above the 50% Fib at $104.73 keeping the overall structure acutely bearish.

Risk sentiment remains in focus, with the WTI contract tracking closely with the S&P 500. Index futures tracking the equities benchmark are quickly erasing overnight gains seen after a broadly supportive set of German GDP figures as all eyes turn to the US CPI release. Expectations call for the annual inflation rate to hit 3.1 percent – the highest in 30 months – while the core reading that strips out volatile items like food and energy prints the strongest level since February 2010. The outcome could swiftly bring fear of rising US borrowing costs after the June expiry of QE2 back into focus, sending crude lower as the risky asset complex finds itself under assault once again.

Crude_Oil_Gold_Vulnerable_as_US_CPI_Threatens_to_Rekindle_Risk_Aversion_body_Picture_1.png, Crude Oil, Gold Vulnerable as US CPI Threatens to Rekindle Risk Aversion

Commodities – Metals

Gold, Silver Prices Remain Anchored to Risk Sentiment

Spot Gold (NY Close): $1505.90 // +4.70 // +0.31%

Gold continues to consolidate between $1519.55, the 50% Fibonacci retracement of the drop from the May 2 high and a rising trend line set from late January. Piercing this downside barrier would amount to a material, medium-term trend change, opening the door for protracted gold weakness over the coming weeks.

As with oil, sentiment trends remain in focus, putting the spotlight on the upcoming US CPI release. While the yellow metal is not a “risky” asset in the strict sense, it has nonetheless found ample support as bulls and bears alike turned to it as a store of value – each for their own reasons – relying on cheap funding through QE2 to finance a good bit of their positions. With that in mind, gold stands to follow the S&P 500 in its response to the release, resuming its decline if shares find themselves on the defensive.

Crude_Oil_Gold_Vulnerable_as_US_CPI_Threatens_to_Rekindle_Risk_Aversion_body_Picture_4.png, Crude Oil, Gold Vulnerable as US CPI Threatens to Rekindle Risk Aversion

Spot Silver (NY Close): $34.72 // -0.45 // -1.29%

Prices remain stuck between resistance at $37.01, the 23.6% Fibonacci retracement of the 4/25-5/6 decline, and the $33.00 figure. As with oil, a period of consolidation after aggressive selling over recent weeks seems both healthy and reasonable, with only a break above the 38.2% Fib at $39.45 giving the bears any cause for concern.

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 and pointing to the US CPI report as the next major inflection point. With that in mind, the gold/silver ration continues to trend higher, suggesting the cheaper metal will underperform its more expensive counterpart.

Crude_Oil_Gold_Vulnerable_as_US_CPI_Threatens_to_Rekindle_Risk_Aversion_body_Picture_7.png, Crude Oil, Gold Vulnerable as US CPI Threatens to Rekindle Risk Aversion

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