Oil and gold head to higher ground

Oil stages an impressive rally

The tail-chasing noise was there for all to see overnight, reaching eardrum splitting decibels. The robust US Manufacturing PMI triggered a squeeze of recent short positions. Brent crude rose 3.67% to USD39.25 a barrel overnight, all the more impressive after probing USD36.00 a barrel earlier in the session. WTI rose 3.80% to USD37.10 a barrel, having tested USD34.00 a barrel earlier in the session.

From a technical perspective, both contracts traced out bullish outside reversal days, making new lows before tracing out a higher close than the day before. WTI is testing its 200-DMA at USD37.00 a barrel, with Brent’s 200-DMA resting at USD40.40 a barrel.

The sentiment was assisted by stories circulating that Russian producers are reconsidering the scale of production increases scheduled for January. Although ignoring the fact that the government makes those decisions has certainly helped the oil rally along.

In Asia, oil has given back some of those outsized overnight gains, with both Brent and WTI edging 0.60% lower. However, the pullback is modest versus the scale of the rally overnight. Although the technical picture suggests further gains ahead, the supply/demand picture tells a different story, particularly with Europe. The intra-day volatility implies that price action is dominated by short-term fast money for now, rather than fundamentals.

With that in mind and given the price action in equities and pro-cyclical currencies, further gains cannot be ruled out. There seems to be plenty of FOMO money waiting to search for short-term bullish gains on oil if tonight’s US election passes without incident.

Gold rises for the second day in a row

Gold shrugged off stronger equities and a firmer US dollar to post its second day of gains overnight. Gold rose 0.90% to USD1896.00 an ounce. Sentiment was perhaps boosted by US Treasury yields easing somewhat, but more than likely, the direct correlation with equity markets remains tight. Gold falling on equity sell-offs and rising with equity rallies.

There remains precious little evidence that gold is attracting haven-based buyers at this time, hedging election risks in their portfolios. Part of the reason is likely to be gold’s inability to shrug off its direct correlation to falls on equity markets, evident this past week.

If the US election passes without incident, a big if, gold may come under sustained downward pressure as the evidence in other asset classes suggests a keenness to reinitiate pro-growth trades. Predicting the nuances of the US election results tomorrow morning is a fool’s errand. Still, gold needs to overcome its 100-DMA here at USD1893.00 an ounce, and the base of the triangle at USD1909.00 an ounce, for the technical picture to flip into bullish territory.

Depending on the US election outcome, the gold haven trade may yet appear. But until that happens, the technical picture suggests that gold is a sell on rallies and needs erode more long positioning before tracing out a longer-term bottom in prices.

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