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Crude Oil, Gold Prices Look to EU Summit Outcome for Direction Cues

Crude Oil, Gold Prices Look to EU Summit Outcome for Direction Cues

2011-10-26 11:42:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • Crude Oil Stalls Below $95 Figure, Euro Debt Crisis Talks at Center Stage
  • Gold Soars to Monthly High as Investors Hedge Bets on EU Summit Success

WTI Crude Oil (NY Close): $93.17 // +1.90 // +2.08%

Crude oil remains anchored to broad-based risk sentiment trends, with the outlook clouded as investors anxiously await the outcome of the week’s second EU debt crisis summit. Officials seemed to get off to a rocky start over the weekend, producing a list of what the EU won’t do to solve the crisis rather than what it will. Looking past the minutiae of would-be proposals leaking to the newswires over recent weeks, it’s clear that the goal of whatever emerges after all is said and done will be – once again – to only temporarily placate the financial markets.

Indeed, the debt crisis was not born of the spending habits of Greece, Italy and company but of the inherent problem in lumping very different economies under one monetary umbrella while maintaining independent and widely divergent fiscal policies. This means that crafting a lasting solution will require cumbersome steps including augmenting the EU’s core treaties, a process that is surely not going to be complete over a weekend. The object of the game right now then is to squash fears of an immediate meltdown, buying time to haggle over the long-term solution in the years ahead, and whatever plan is unveiled will be judged on its merits to achieve just that.

On the economic data front, expectations point to a mixed set of US releases, with Durable Goods Orders forecast to drop 1 percent to yield the largest drawdown in three months while New Home Sales snap four consecutive months of losses to rise 1.7 percent. Still, at just 300k, the anemic sideways drift in sales of new properties is to remain firmly in place. Another hefty dollop of third-quarter earnings reports is also on tap, with figures from global business-cycle sensitive names like Lockheed Martin, Boeing and ConocoPhilips in the spotlight.

Looking at the technical picture, prices put in a Shooting Star candlestick below resistance at $94.87, the 50% Fibonacci retracement of the drop from May’s swing high, pointing to a loss of bullish momentum and hinting a move lower is ahead. Initial support lines up at $90.17, the 38.2% Fib, with a break below that targeting the 23.6% and 38.2% extension levels at $85.33 and $79.62.

Crude_Oil_Gold_Prices_Look_to_EU_Summit_Outcome_for_Direction_Cues_body_Picture_3.png, Crude Oil, Gold Prices Look to EU Summit Outcome for Direction Cues

Spot Gold (NY Close): $1705.53 // +52.05 // +3.15%

As we have discussed at length in previous reports, gold (and precious metals in general) find investment demand if investors are expecting one of two scenarios: runaway inflation that calls for a tangible-asset hedge, or fear of a meltdown across financial markets that disrupts the valuation of so-called “paper” assets and encourages capital to seek out an alternative, physical store of value.

It was arguably the second of these that spurred the yellow metal to soar to the highest level in a month and surpass the $1700/oz figure as traders braced for the possibility that the EU debt crisis summit will fall short of expectations, unleashing massive blood-letting across global exchanges. Looking ahead, the metal seems likely to remain supported at least until such fears are laid to rest over the coming 24 hours. Needless to say, if European leaders fail to deliver, the aggressive rally has scope to continue.

Sizing up the technical landscape, prices followed up a bullish Piercing Line candlestick pattern identified earlier with a break above resistance at $1680.78, the 38.2% Fibonacci retracement, exposing the 50% barrier at $1726.60. The 38.2% level has been recast as near-term support.

Crude_Oil_Gold_Prices_Look_to_EU_Summit_Outcome_for_Direction_Cues_body_Picture_4.png, Crude Oil, Gold Prices Look to EU Summit Outcome for Direction Cues

Spot Silver (NY Close): $33.26 // +1.50 // +4.71%

As with gold, the threat of a disappointing outcome to the EU debt crisis summit catapulted silver prices higher, with the bulls likely to remain broadly in control for now as jittery investors prepare for the key event risk. On the technical side of things, prices took out resistance at $32.67, the 38.2% Fibonacci retracement, exposing the 50% level at $34.72. The 38.2% Fib has been recast as near-term support.

Crude_Oil_Gold_Prices_Look_to_EU_Summit_Outcome_for_Direction_Cues_body_Picture_5.png, Crude Oil, Gold Prices Look to EU Summit Outcome for Direction Cues

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

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

To be added to Ilya's e-mail distribution list, send a note with subject line "Distribution List" to ispivak@dailyfx.com

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