Oil falls, gold dips on taper talk

Oil remains on the defensive

Oil prices tumbled on Friday thanks to fears over the European economic recovery and the ongoing threats by President Biden and other leaders to release strategic reserves onto the markets to push down prices. Brent crude tumbled 3.23% to USD 78.45 a barrel, and WTI collapsed by USD 4.05 to USD 75.65 a barrel.

In Asia, both Brent and WTI have added 25 cents to USD 78.70 and USD 75.90 a barrel on modest short-covering. Brent has resistance at USD 77.00 a barrel, with the 100-day moving average (DMA) at USD 74.00 providing support. WTI has resistance at $80.00 a barrel, with the 100-DMA at USD 76.70 the next major support.

The threat of coordinated SPR releases from various economies is more noise than substance, with President Biden unable to release a material amount from the SPR unless the situation can be legally defined as a material supply disruption. That would be a tenuous connection to make, as supplies continue to flow globally, albeit at higher prices. Europe is a rather more sobering situation, and if the Eurozone countries move back into more strict lockdowns into the holiday season, the knock-on effects on consumption will be noticeable.

Until the European situation clarifies one way or the other, oil rallies are likely to struggle for momentum above USD 82.00 and USD 80.00 respectively. Nevertheless, with oil prices now around 10% lower than a few weeks ago, and demand still robust in America and Asia, I do not anticipate another huge sell-off from here.

Fed taper torpedoes gold

Comments on Friday by the Fed Vice-Chairman suggesting that a fast Fed-taper could be in order, torpedoed gold’s rally, sending it 0.70% lower to USD 1846.00 an ounce. Once again, gold’s vulnerability to any hint of tighter US monetary policy has been highlighted, with a US dollar rally on Friday also weighing on gold prices.

That said, gold’s technical picture remains constructive in the medium-term, especially as it has spent over a week above the previously formidable zone of resistance between USD 1832.00 and USD 1825.00 an ounce. Gold’s Relative Strength Index (RSI) also hit extreme overbought levels last week, but Friday’s retreat has moved it back to neutral, another supportive technical factor.

Gold has risen to USD 1847.50 in quiet Asian trading and further losses cannot be ruled out as fast-money longs are culled. They should be limited to USD 1830.00 an ounce though, with a return to USD 1800.00 unlikely at this stage. Gold has topped out a number of times between USD 1870.00 and USD 1880.00 last week, and this denotes its next major barrier to further gains.

In the bigger picture, the repression of rates in the long-end of the US yield curve, along with US data showing that inflationary pressures are rising, finally seems to be bringing the inflation hedging trade back. With inflationary pressures reflecting only in short-dated rates, for now, only more officials jumping on to a faster-taper narrative, or a sudden move higher in longer-term US yields is likely to derail gold’s rally. Gold will likely consolidate in a USD 1830.00 to USD 1860.00 an ounce range over the first half of this week.

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