Fundamentals, Oil & Gold

Gold Rally Driven by Fed Outlook, Oil Meets Key Resistance

Commodities – Energy

Oil Tests Trend-Defining Resistance, Jobs and Inventory Data on Tap

Crude Oil (WTI)       $78.03       -$0.34       -0.43%
As we suggested yesterday, oil gained to test medium-term falling channel resistance near $79 after breaking above a minor downward-sloping channel earlier in the week. Prices are stalling at this juncture as a meaningful catalyst emerges, with a break higher targeting the significant technical and psychological hurdle at $80. On the fundamental front, November’s US employment change figures from ADP will be interesting to watch ahead of Friday’s more significant Nonfarm Payrolls data, with the health of the American consumer translates directly into expectations for oil demand going forward. Crude inventory figures from the US Department of Energy are also on the docket. Yesterday’s API inventory figures showed a decline in the stock of crude, and the DOE metric is expected to yield a similar outcome.

Commodities – Metals

Gold Sets Another Record High, Fed Outlook Driving Rally

Gold       $1212.43       +$15.82       +1.32%
Gold has continued to defy the skeptics (ourselves included), surging past the $1200 level to new record highs. We are in uncharted territory at this point from a technical perspective, but relative strength studies are firmly in overbought territory and speculative long positions are at the highest in at least 16 years, which point to prices that are highly overstretched at this point. Gold prices are now nearly 87% inversely correlated with the spread between March 2010 and December 2010 fed funds futures, suggesting recent gains are a reflection of the US interest rate outlook for next year and thereby a function of expectations of a weaker US Dollar rather than any supply/demand factors. In the near term, this means tomorrow’s ADP job figures are of most significance, with any meaningful improvement in the market’s perception of US labor market prospects being supportive of a more hawkish Fed and weighing on the yellow metal.

Silver       $19.17       +$0.08       +0.42%
Silver too shows a formidable correlation to the priced-in Fed outlook as reflected in the March – December 2010 fed funds futures spread, but the correlation is meaningfully weaker at 73.3%. Technically, prices are approaching major resistance at $19.47, the July 2008 swing high. Recent gains show sharp negative divergence with relative strength studies, hinting that (at least) a pullback is likely before any attempt to push higher and challenge record highs near $22.