Crude Oil Likely to Decline While Gold Gains on Soft US Economic Data
Commodities – Energy
Crude Oil Consolidation to Yield to Renewed Selling
WTI Crude Oil (NY Close): $100.59 // +0.36 // +0.36%
Prices continue to consolidate below the 38.2% Fibonacci retracement of the drop from the May 2nd high at $102.35. A break above this boundary exposes the 50% level at $104.73. Broadly speaking, anything shy of that keeps the overall structure broadly bearish. Near-term support stands at the psychologically significant $100 figure, followed by the 5/6 low at $94.65.
A quiet session is ahead, with futures markets closing early in the US for the Memorial Day holiday. Prices came under pressure overnight, which newswires chalked up to positioning ahead of this week’s packed US economic calendar that threatens to show the world’s top economy is meeting with strong headwinds. Most critically, separate reports are expected to show that growth in the US manufacturing sector slowed for the third consecutive month in May to the weakest pace since October 2010 while the economy added just 185,000 jobs, the least since January.
Indeed, a Citigroup index tracking positive US economic surprises suggests the trend in data releases has been pointing to steadily deterioration. The rapid approach of the expiration of QE2 – set to conclude with the Fed’s final bonds purchase on June 9 – ought to compound downward pressure. As we have suggested repeatedly over recent weeks, the program’s end is likely to precede a rise in US borrowing costs through the second half of the year, which is likely to unleash a short-term unwinding of bets on a range of risky assets (including crude) as well as long-term downward pressure on economic growth when it is already clearly fragile.
Commodities – Metals
Gold to Extend Rebound Amid Risk Aversion
Spot Gold (NY Close): $1536.40 // +17.25 // +1.14%
Prices have taken out resistance at $1533.12, the 61.8% Fibonacci retracement of the drop from the May 2 high, clearing the way for an advance to the 76.4% level at $1549.91. The 61.8% Fib has been recast as near-term support, with a break back below that targeting the 50% retracement at $1519.55.
Gold’s recently rediscovered role as a safe haven asset may allow the metal to rise this week if the pessimism felt overnight about the upcoming set of US economic releases persists upon the return of liquidity to the markets following the Memorial Day holiday. The reemergence of Euro Zone sovereign risk fears over the weekend further bolster the case for short-term gains. Greek CDS rates hit the highest in a week overnight after Der Spiegel reported the country would not meet any of the fiscal goals set out in the terms of the EU/IMF bailout deal.
Spot Silver (NY Close): $37.99 // +0.69 // +1.86%
Prices are wedged between $36.44 and $38.99, the 23.6% and 38.2% Fibonacci retracements of the 4/25-5/6 decline, respectively. The correlation between gold and silver remains iron-clad, hinting the cheaper metal is likely to follow its more expensive counterpart higher if risk aversion grips financial markets anew. As we have noted previously, a significant inverse correlation between the gold/silver ratio and the S&P 500 hints the yellow metal will outperform if a flight to safety materializes.
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