Oil and gold start week in red

Oil’s rally fades in Asia

Oil had a positive session on Friday, both Brent and WTI recording over 3.0% gains boosted by Biden stimulus hopes. Risk aversion seen in other asset classes has set in on energy markets today in Asia though. Brent crude has fallen 1.70% to USD55.30 a barrel, and WTI has declined 1.55% to USD51.80 a barrel.

Although the White House’s easing of diplomatic ties with Taiwan has spooked markets in Asia, oil’s rally is not in danger at this stage, even as the US dollar rises. Brent crude would need to fall through USD53.50 a barrel to signal a much deeper correction. Similarly, WTI would need to retreat through USD50.00 a barrel. The oil rally is driven by the physical change of supply from Saudi Arabia’s unilateral 1 million barrel per day production cut. As such, in what may be famous last words, oil markets should have more structural support than others suffering from speculative largesse.

Brent crude has formed a double top at USD56.30 a barrel, and if USD53.50 a barrel fails, could extend losses back to the USD50.00 region. WTI has traced out a double top at USD52.70 a barrel, with a loss of USD50.00 a barrel potentially extending losses to USD46.00 a barrel.

Gold’s bonfire of the vanities continues

Gold markets suffered a judgement day Arnold Schwarzenegger would have been proud of on Friday. The rise in US yields pushed gold down through its 100-day moving average (DMA), at USD1895.00 an ounce. That sparked a disorderly rush for the exit doors by speculative longs that had been remorselessly squeezed since the rally of last Monday. Gold collapsed by 3.35% to USD1840.00 an ounce as the New York session finished.

The rout has continued in Asia, with gold unable to find any friends even as the risk aversion winds seem to be getting more assertive on other asset classes. Gold has fallen by 1.0% to USD1831.50 an ounce, having sipped briefly below USD1820.00 an ounce earlier in the session.

Gold is now flirting with its 200-DMA, today at USD1837.00 an ounce. A daily close below this is a signal that the downward correction will continue. Much will depend on US bond markets, which open later in London. If US yields continue moving higher, gold will face more selling pressure into a market that looks like it is still speculatively long.

Gold’s resistance is now far distance at USD1892.50 an ounce, its 100-DMA. Support appears in the USD1820.00 an ounce region with critical long-term support at USD1760.00 an ounce, its 61.8% Fibonacci, traced out in November. I have highlighted USD1760.00 an ounce as a long-term structural low for gold prices previously. As long as USD1760.00 an ounce remains intact, gold remains itself in a longer-term uptrend. However, the reaction to the modest rise in US yields has surprised me. A failure of USD1760.00 an ounce would call for a reassessment and gold’s losses in that scenario could extend to USD1650.00 an ounce initially.

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