Oil and gold head lower

Profit-taking hits oil prices

Oil prices beat a modest retreat overnight with official US Crude Inventory data broadly neutral. Headline crude inventories fell more than expected, but distillate and gasoline inventories rose more than expected. That was enough to spark speculative longs to lock in some profits with Brent crude and WTI’s relative strength indices (RSIs) having been in overbought territory for most of this week.

Brent crude eased 1.25% to USD56.00 a barrel, and WTI fell 0.80% to USD52.85 a barrel. Both contracts remain unchanged in Asia. With gas prices still at record highs in Asia, oil is unlikely to retreat far in today’s session.

Both RSIs for Brent crude and WTI remain in overbought territory, suggesting that further downward pressure could persist. Any retreat lower will be due to a readjustment of positioning though and should not portend a structural change in oils outlook. China data continues to outperform, and a monstrous US stimulus package appears to be on the way. Both should ensure that plenty of physical buyers will appear on any price dips, limiting losses.

Brent crude has initial resistance at its overnight high at USD57.40 a barrel followed by USD60.00 a barrel. Its correction could extend to USD53.50 a barrel. WTI has resistance at the overnight high at USD53.90 a barrel and possibly looks the more vulnerable of the two, the nearest meaningful support being USD50.00 a barrel.

Gold’s price action is ominous

Despite US yields easing overnight, the US dollar still strengthened. That was enough to send gold 0.45% lower to USD1845.00 an ounce overnight. Asian traders appear nervous as well, with gold falling another 0.40% to USD1838.00 an ounce this morning.

Gold has now fallen through its 200-DMA at USD1841.00 an ounce and if it closes below there tonight, would be a bearish technical signal. Monday’s low at USD1817.00 an ounce is the next support level, and failure opens a retest of the psychological USD1800.00 an ounce level. Gold’s long-term critical support is the 61.80% Fibonacci at USD1760.00 an ounce. Resistance lies at USD1865.00 an ounce, followed by the 100-DMA at USD1890.00 an ounce.

It is an ominous development for gold that it fell overnight, even as the key US 10-year yield also eased lower. If the US 10-year yield reverses course and starts to rise again, reducing the negative real yield carry, I fear that gold may suffer another sustained bout of selling. A US stimulus package of USD1.5 to 2.0 trillion could be enough to tip the balance.

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