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Oil Set to Rise on Seasonal Flows, Gold Near-Term Outlook Clouded

Oil Set to Rise on Seasonal Flows, Gold Near-Term Outlook Clouded

2011-12-23 05:50:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points

  • Crude Oil Poised to Extend Gains Amid Seasonal Profit-Taking
  • Gold Near-Term Outlook Clouded, Overall Bias Favors Losses

WTI Crude Oil (NY Close): $99.53 // +0.86 // +0.87%

Crude oil prices appear poised to continue higher as S&P 500 stock index futures advance, suggesting the corrective unwinding of bets on risk aversion amid year-end profit-taking is set to continue.A supportive set of second-tier US economic indicators promises to reinforce this dynamic.

Durable Goods Orders are expected to rise 2.2 percent in November, marking the largest increase in four months, while New Home Sales rise to the highest since April over the same period. Personal Income and Spending readings are likewise on tap, with forecasts calling for both to inch higher once again (marking the third consecutive increase in the former and the fifth one in the latter).

Prices are testing the top of a falling channel set from the November 17 high, now squarely at the 100.00 figure, with a break higher targeting 101.39. Near-term support remains at 97.89. A candle in Star position hints preliminary signs of a bearish reversal may be emerging but confirmation is needed before anything can be said with confidence.

Oil_Set_to_Rise_on_Seasonal_Flows_Gold_Near-Term_Outlook_Clouded_body_Picture_3.png, Oil Set to Rise on Seasonal Flows, Gold Near-Term Outlook Clouded

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1605.55 // -9.68 // -0.60%

Gold decoupled from the Dollar-driven dynamic evident over recent weeks yesterday, moving lower along with the greenback. Traders’ increasing awareness of improving US economic data and its subsequent implications for Federal Reserve monetary policy seem to be behind the budding divergence. Indeed, gold ETF holdings – a proxy for investment demand – topped out and began trending lower just a day after December’s FOMC rate decision poured cold water on QE3 expectations, sapping the yellow metal’s appeal as an inflation hedge. Seasonal flows are likely helping as well, with traders booking profits after another year of double-digit gold gains.

With that in mind, the inverse correlation between gold and the US Dollar (ticker: USDollar) as well as the positive relationship with the S&P 500 benchmark stock index remains significant, the greenback remains a meaningful conduit for the transmission of risk sentiment. This casts a cloud of uncertainty over near-term price action, making it unclear whether gold will prove most responsive to Dollar weakness amid a broad-based rebound in risky assets or its own drivers. Expectations of continued improvement on the US data front into the week-end seems to argue for the latter, but reading too much into whatever patterns emerge in thin pre-holiday trade appears unwise. With risk aversion due to return in January however, both sides of the equation seem destined to align to the detriment of gold prices in the year ahead.

Prices followed a bearish Shooting Star candlestick established following a retest of resistance at the bottom of a previously broken falling channel with a break through initial support at 1609.05. The bears now aim to challenge the long-term trend line dating back to late October 2008 at 1565.52. Near-term resistance is now at 1609.05 and reinforced by the channel bottom at 1615.53.

Oil_Set_to_Rise_on_Seasonal_Flows_Gold_Near-Term_Outlook_Clouded_body_Picture_4.png, Oil Set to Rise on Seasonal Flows, Gold Near-Term Outlook Clouded

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $29.08 // -0.32 // -1.08%

As with gold, silver continues to show a significant inverse relationship with the US Dollar and positive one with the S&P 500, hinting the pickup in risky assets hinted ahead bodes well for the cheaper precious metal. Silver EFT holdings have been essentially flat for several months however, suggesting that the larger range carved out between 28.41 and 35.66 since September is likely to remain in place. Shorter term, prices are still wedged below 29.79. A break higher exposes rising trend line support-turned-resistance at 31.87 while a push to the downside targets 26.05.

Oil_Set_to_Rise_on_Seasonal_Flows_Gold_Near-Term_Outlook_Clouded_body_Picture_5.png, Oil Set to Rise on Seasonal Flows, Gold Near-Term Outlook Clouded

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

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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