RS: Precious Metals Outlook Clouded, Bias for Loss
Gold decoupled from the dollar-driven dynamic evident over recent weeks yesterday, moving lower along with the greenback. Traders’ increasing awareness of improving US economic data and its subsequent implications for Federal Reserve monetary policy seem to be behind the budding divergence. Indeed, gold ETF holdings – a proxy for investment demand – topped out and began trending lower just a day after December’s FOMC rate decision poured cold water on QE3 expectations, sapping the yellow metal’s appeal as an inflation hedge. Seasonal flows are likely helping as well, with traders booking profits after another year of double-digit gold gains.
With that in mind, the inverse correlation between gold and the US dollar (ticker: USD) as well as the positive relationship with the S&P 500 benchmark stock index remains significant, the greenback remains a meaningful conduit for the transmission of risk sentiment. This casts a cloud of uncertainty over near-term price action, making it unclear whether gold will prove most responsive to dollar weakness amid a broad-based rebound in risky assets or its own drivers. Expectations of continued improvement on the US data front into the week-end seems to argue for the latter, but reading too much into whatever patterns emerge in thin pre-holiday trade appears unwise. With risk aversion due to return in January however, both sides of the equation seem destined to align to the detriment of gold prices in the year ahead.
Prices followed a bearish Shooting Star candlestick established following a retest of resistance at the bottom of a previously broken falling channel with a break through initial support at $1,609.05. The bears now aim to challenge the long-term trend line dating back to late October 2008 at $1,565.52. Near-term resistance is now at $1,609.05 and reinforced by the channel bottom at $1,615.53.
As with gold, silver continues to show a significant inverse relationship with the US dollar and positive one with the S&P 500, hinting the pickup in risky assets hinted ahead bodes well for the cheaper precious metal. Silver EFT holdings have been essentially flat for several months however, suggesting that the larger range carved out between $28.41 and $35.66 since September is likely to remain in place. Shorter term, prices are still wedged below $29.79. A break higher exposes rising trend line support-turned-resistance at $31.87 while a push to the downside targets $26.05.
Crude oil prices appear poised to continue higher as S&P 500 stock index futures advance, suggesting the corrective unwinding of bets on risk aversion amid year-end profit-taking is set to continue. A supportive set of second-tier US economic indicators promises to reinforce this dynamic.
Durable Goods Orders are expected to rise 2.2% in November, marking the largest increase in four months, while New Home Sales rise to the highest since April over the same period. Personal Income and spending readings are likewise on tap, with forecasts calling for both to inch higher once again (marking the third consecutive increase in the former and the fifth one in the latter).
Prices are testing the top of a falling channel set from the Nov. 17 high, now squarely at the $100.00 figure, with a break higher targeting $101.39. Near-term support remains at $97.89. A candle in Star position hints preliminary signs of a bearish reversal may be emerging but confirmation is needed before anything can be said with confidence.
