Oil dips, gold rallies continues

Oil edges lower in Asia

Muted holiday trading has seen some unwinding of Friday’s rallies, with Brent crude and WTI edging lower. On Friday, Brent crude rose 2.60% to USD64.65 a barrel, and WTI rose by 3.05% to USD61.65 a barrel after the impressive Non-Farm Payroll data. Both contracts have edged 20 cents lower today.

The seemingly invincible accelerating US recovery has offset OPEC+’s announcement on Thursday of a scaling back of production cuts starting in May. Notably, Saudi Arabia will also unwind all of its unilateral production cut by July. The addition of another 2 million barrels a day into international markets by OPEC+ is a calculated risk on the global recovery, maintaining momentum. Thankfully, with monthly decisions now, the group has the flexibility to temper those proposals if things don’t go to plan.

The OPEC+ decision, perhaps nudged along by increasing Iranian production heading to China, probably means we have seen the best of the oil rally now for the next few months. Positive progress on Covid-19 in Europe and India, and the Biden infrastructure proposal in Washington DC will be needed to get Brent crude back to the USD70.00 a barrel area anytime soon.

For now, Brent crude continues to move in a wide USD60.50 to USD65.50 range, with WTI is pinned in a USD57.50 to USD62.50 range, with a slight upside bias on both.

Gold surprises once again

Gold rallied impressively for the second day in a row on Friday, climbing 1.30% to USD1730.00 an ounce. Gold has now unwound all last week’s losses, although it has drifted lower to USD1725.00 an ounce in moribund Asian trading.

It is becoming clear to me that gold’s sensitivity is not to future inflation expectations but rather, to moves in US bond yields, notably the 10-year tenor. The 10-year and 30-year yields have fallen quite notably on Thursday and Friday, and gold has duly recaptured all of its losses. So, gold has become, in effect, a US zero-coupon bond (gold doesn’t pay interest).

The rally on Friday has moved gold back into the middle 50.0% and 61.80% Fibonacci retracement levels at USD1760.00 and USD1680.00 an ounce. That implies that the long-term base that gold has been trying to form is back in play again. Alas, gold’s correlation to the US yields may make that too simplistic a theory and given that I believe that the US yield curve steepening has not run its course, gold, therefore, remains a sell on rallies.

Gold has initial resistance at USD1745.00 an ounce, with support at USD1715.00 and USD1705.00 an ounce. With Europe on holiday today, I suspect it will remain in a USD1720.00 to USD1730.00 an ounce range until New York arrives.

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