Oil rally continues, gold slips

Oil testing multi-month highs

Oil prices staged another strong move higher overnight, propelled by the AstraZeneca vaccine news, impressive US PMI data, and the expectation that OPEC+ will extend production cuts next week. That saw Brent crude rise 1.55% to USD45.80 a barrel, and WTI rise 1.0% to USD42.85 a barrel.

The news that Trump has permitted the release transition funding to the Biden camp has further boosted prices in Asia. Markets have interpreted that as a concession, rightly or wrongly. With a Biden presidency perceived as more international trade-friendly, markets have assumed that consumption in 2021 will rise again. Brent crude has risen 1.50% to USD46.45 a barrel this morning, with WTI also climbing 1.50% to USD43.50 a barrel.

The rallies in Asia have left both contracts just shy of multi-month highs with no sign that upward momentum is waning. Nor is either contract’s relative strength index (RSI) in very overbought territory, a key indicator for market corrections. The rapidly tightening contango on Brent’s calendar spread curve is also price supportive.

Brent crude is testing its July to September highs at USD46.50 a barrel. A daily close above USD46.50 implies further gains to USD48.50 a barrel, with only a fallback through USD44.90 a barrel suggesting further bullishness is misplaced. WTI is testing its July to September highs around USD43.50 a barrel with its next target being the USD48.00 a barrel region. Only a retreat through USD42.00 a barrel changes that outlook.

With OPEC+ due to meet on Monday, where they will almost certainly expend the production cut targets, oil prices should remain broadly supported. As is the wont of OPEC+, nothing can be taken for granted, and if they break ranks, an ugly correction lower will ensue. The arrival of three commercially viable Covid-19 vaccines is changing the picture for the world in 2021, and with momentum so strong, it would be foolish to say the rally in oil prices is near an end. I also remain confident that not even OPEC+ would shoot themselves in the foot next week.

Gold is in trouble

Gold failed at trendline resistance at USD1876.00 an ounce overnight and proceeded directly lower without passing go. Gold finished the overnight session 1.80% lower at USD1838.00 an ounce and has fallen another 0.75% to USD1824.00 an ounce this morning.

After recovering from my initial shock that I called gold correctly for a change, several things have become apparent. The gold market remains seriously long and wrong, with speculative dip buyers of the November 9th capitulation throwing in the towel after gold moved through USD1850.00 an ounce. The arrival of a third vaccine candidate to the market is causing material reassessments to the growth trajectory of the world economy in 2021. In this respect, gold’s haven role has diminished. The overnight PMI data from the US suggests that despite its vaccine woes, it is more resilient than even the author has expected, and thus may not need as much monetary and fiscal support as previously thought. Finally, with a formal US presidential transition now likely, a large source of financial market uncertainty has been removed, especially as a Biden administration is perceived as more trade-friendly.

Although gold should still benefit from the US dollar debasement likely to be seen throughout all of 2021, if US yields are nearing their lows, gold will struggle. We can probably put talk of USD3000.00 an ounce in the cupboard and leave it there. Gold needs a “Trump-special” to get out of trouble from here.

Gold will probably recapture USD2000.00 an ounce at some stage in 2021, but it may go there via lower levels. In the short-term, gold has resistance at USD1850.00 an ounce, with an initial target of USD1796.60 an ounce, the 200-day moving average. That is followed by USD1720.00 an ounce and possibly the USD1680.00 regions.

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