Everyone loves oil, gold drops

Oil rises on stronger demand

Even non-energy traders are placing bets that oil prices will continue to rise. Everyone is turning overly bullish with crude prices.  Energy stocks have outperformed this year as oil prices hardly show any signs of slowing down.  The crude demand outlook is very robust as recoveries across the US, Europe and Asia, will have demand return to pre-COVID levels in the second half of next year.  The lack of investment in new wells is leaving this market very sensitive to spikes in oil prices on any unforeseen disruptions.

Oil prices continue to extend higher into overbought territory but that could end if the Fed delivers a less dovish tone tomorrow that sends the dollar tentatively higher.  WTI crude should struggle to extend gains well beyond the USD72.00 level.

Gold

Gold’s gotten beaten up ahead of the FOMC policy decision as investors are pricing in a major pivot from the Fed.  While traders are divided over the inflation debate, most agree that now is the time to talk about reducing asset purchases.  Heading into this Fed meeting a ton of dovishness has already been priced in so many gold traders have been quick to lock in profits.

The Fed will finally start to talk about tapering, but that probably won’t actually happen until the very end of this year if not early next.  Gold volatility will remain elevated throughout the initial reaction and days post-Fed.  The Fed will likely remain in wait-and-see mode with both inflation and the labor market recovery for the next few months and that should be supportive for inflows into gold.  Gold’s path back towards the USD2000 level should remain intact even if they signal tapering in late August (Jackson Hole Symposium) or in September, with it actually happening in December.  The Fed’s not ready to abandon its ultra-accommodative stance just yet and that should keep gold bulls happy.

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