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Precious Metals & Energy - Weekly Review and Outlook

CommoditiesJan 09, 2022 07:48AM ET
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By Barani Krishnan

Investing.com -- An inflection point is defined as a point of a curve at which a change in the direction of curvature occurs. In trading perspective, it’s the point at which your position could go in a way that lets you raise a glass in celebration - or groan at how you’ve dismally misread the market once again.

Gold is at such a point after settling Friday at just under the crucial $1,800 an ounce level, helped by a modest bounce on the day despite a near 2% drop on the week for its biggest weekly decline since November.

Yields on the U.S. 10-year Treasury note hit two-year highs just before the week closed, and the Dollar Index dipped but not far from its recent peaks.

Yet, gold showed resilience in its latest session, indicating that it could be running on the steam of U.S. inflation, which was chugging at its fastest pace in 40 years. That not only makes the yellow metal an interesting trade but also one that’s getting harder to read.

“Gold had a bad week, but it could have been much worse when you consider the 10-year Treasury yield went from 1.53% to 1.75%,” Ed Moya, analyst at online trading platform OANDA, said in a post on Friday just before the benchmark yield rate went to January 2020 highs of 1.79%.

While gold labored below the $1,800 level and the 50- and 200-day Simple Moving Averages, “a continued selloff seems less likely”, Moya, said. But he conceded that “if bearishness resumes next week, buyers could emerge at the $1,770 area.”

Monday was a déjà vu of sorts for gold longs who entered the first trading day of 2022 with bloodied noses, taking their hardest knocking in six weeks from US Treasury yields and a dollar spiking on rate hike expectations.

Even so, after plunging about 1.5% or more on the day - their most since the third week of November - gold prices regained the $1,800 territory but only just, with futures closing the New York session at $1,800.10 an ounce while spot settled at $1,800.85.

That led to a mixed messaging in gold: That the crowd believing in the yellow metal as an inflation hedge could try and push it higher in the coming days and weeks even as short sellers look to knock it down further if yields and the dollar continue rising in a rally that could be fatal to gold.

Monday’s action in gold also proved something else: that a massive wall of resistance awaited longs at above $1,830 an ounce.

Gold has tried in vain to crack the $1,830 resistance numerous times since November. It made another attempt on Wednesday, just before the release of the Federal Reserve meeting minutes for December that indicated the first pandemic-era U.S. rate hike might come as early as March. Those Fed minutes have again spelled a boon for yields and the dollar, and gloom for stocks and safe-havens such as gold.

The $1,830 wall could now be a longer-term stay, say chartists plotting gold’s next technical move.

”The prices of $1,829 and $1,832 are both Fibonacci retracements, the latter of which is the 38.2% marker of the 2020-2021 major move,” precious metals senior strategist James Stanley wrote in a blog post that appeared earlier this week on Daily FX.

“This same confluent zone caught highs in gold during July, August and September of last year,” he said.

The bearish flag for gold in 2022 could not be missed given the environment in which the Fed is expected to begin lifting rates at some point this year, Stanley noted, adding: “Timing remains of issue, but the accompaniment of a shorter-term bear flag keeps the look on the short side of the market.”

And that short side could take gold deeper below, to under $1,700, he said.

Stanley added that in 2021, three different tests of the $1,680 zone created a support area that served as a recent floor for the yellow metal. “That horizontal zone came into play in March, April and August, with an assist in August from a longer-term Fibonacci retracement from which a 38.2 plots right at $1,682.”

“Of note, those support bounces appear to be carrying a diminishing marginal impact, which has allowed for a bearish trendline to form. The bearish trendline combined with horizontal support makes for a descending triangle formation, which will often be approached with the aim of bearish breakdowns.”

Gold has traditionally been touted as a hedge against inflation, although that argument was weakened last year as the yellow metal’s prices steadily fell in the face of ramping price pressures in a U.S. economy rebounding aggressively from the coronavirus pandemic. Often, gold fell at the expense of yields and the dollar as both rallied on expectations of rate hikes by the Fed to tamp down inflation.

The Fed has laid out an expedited timetable for ending its pandemic-era stimulus and said it could have as many as three rate hikes in 2022. But those plans will also depend on its ability to keep inflation at 2% a year and unemployment ideally at around the 4% level that it defines as “maximum employment”.

“The Fed is unlikely to have as many rate hikes as it thinks in the coming year and if employment slows again for any reason, hedging in gold could again become a theme,” said Phillip Streible, precious metals strategist for Blue Line Futures in Chicago.

The U.S. jobless rate soared to a record high of 14.8% in April 2020 after the COVID-19 outbreak, but fell back to 3.9% last month - meeting the Fed’s target for maximum employment. But the US Consumer Price Index and the Fed’s preferred inflation gauge - the core Personal Consumption Expenditures Index - both grew at their fastest in 40 years in November.

News of rate hikes are almost always bad for gold, which somewhat reflected this last year as it closed 2021 down 3.6% for its first annual dip in three years and the sharpest slump since 2015.

But some analysts think that if the U.S. inflation theme remains strong through 2022, then gold could rebound, and even retrace 2020’s record highs above $2,100 - which, incidentally, came on the back of concerns about soaring price pressures.

Gold Price Roundup & Technical Outlook

Gold futures’ most active contract on New York’s Comex, February, settled up $8.20, or 0.5%, at $1,797.40.

For the week, it fell 1.7% after Thursday’s slump of almost 2%.

Sunil Kumar Dixit, technical strategist at skcharting.com, said gold’s outlook for the week ahead was full of possibilities on either side of the fence.

“There’s an oversold stochastic on the daily chart and a positive closing on the daily chart as well that can cause some recovery if prices are supported above $1,798,” said Dixit. ”It may test $1,810 as the first target and extend that to $1,825 on consistent buying.”

He noted that gold had tested the previous week's high of $1,831 and faced brutal rejection, breaking below $1,789 and touching $1,782 before settling down $31 for the week at a 50% Fibonacci retracement measured from May 2021 high of $1,916 to the March 2021 low of $1,678.

“Failure to hold above $1,797 may resume selling to retest the $1,782 low and extend the downside to $1,770-1,768. That would mark a 61.8% Fibonacci level of aforementioned retracement. The $1,770-$1,768 zone is key to a major swing low of $1,753.”

Oil Market Roundup

Crude prices dipped Friday as longs in the market took some profit after a four day run-up, but the week was still a big one for oil bulls enthused by OPEC’s decision to raise output in a market still troubled by the impact of Covid variants on the global economy.

An underwhelming U.S. jobs report for December - with just 199,000 positions being added versus expectations for 450,000 - also weighed on the latest trading session on oil, although the country itself was at the Fed’s definition of maximum employment with a jobless rate just shy of 4%.

“While optimism is high that the Omicron variant’s impact on the crude demand outlook will be short-lived, it is too early to be optimistic that the worst of this wave is over,” said OANDA analyst Moya. “With the US still seeing parts of the country struggling with hospitalizations and Germany considering fresh curbs, and as China continues to resort to harsh lockdowns, the short-term demand outlook still has a handful of headwinds.”

But while that may be the case, global producer alliance OPEC+ was also keeping a tight leash on output despite agreeing to a 400,000-barrel-per-day increase for February - a trend it has kept to since August as demand for crude returns to pre-pandemic levels.

“The oil market remains very tight and that should remain the case for the first half of the year as the growth outlook across the U.S. and Europe remains very strong,” Moya added.

Aside from confidence over OPEC+'s market maneuvers, oil prices were also boosted this week by geopolitical risk over the crisis in Kazakhstan.

Crude Price Roundup & Technical Outlook

West Texas Intermediate, the benchmark for U.S. crude, settled down 56 cents, or 0.7%, on the day at $78.90 per barrel. For the week, WTI rose just over 5%, gaining for a third straight week in a rally that has delivered about 10% in all.

London-traded Brent, the global benchmark for oil, slipped 24 cents, or 0.3%, to settle Friday at $81.75. For the week, Brent rose more than 5%, also rising for a third week in a row in a run-up that has delivered about 10% in all.

Dixit of skcharting.com said WTI could consolidate in sideways action but with a bullish bias after last week’s bullish wave supported by the $74 level that shot to the $80 psychological barrier.

“Trading on the stronger side of $80 can send U.S. crude to the $83 and $85 areas, amid mid-term targets for $89 and $90,” said Dixit. “But the upside momentum may fizzle out if major short term support areas of $75 and $73 fail.”

Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.

Precious Metals & Energy - Weekly Review and Outlook
 

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Comments (15)
Heine Pedersen
Heine Pedersen Jan 09, 2022 3:04PM ET
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Gold won't go anywhere before oil hits 100$.. Mark my words
Robert Strougo
Robert Strougo Jan 09, 2022 1:16PM ET
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Agression by china and or Russia can be a game changer for commodies
Mthobisi Mncwabe
Mthobisi Mncwabe Jan 09, 2022 1:16PM ET
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I've already placed a buy on gold, closing 4 am, South African time
Brõther Bõyy
Brõther Bõyy Jan 09, 2022 1:16PM ET
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same applies
Heine Pedersen
Heine Pedersen Jan 09, 2022 1:16PM ET
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Forget it. Take a look at natural gas instead..
George Jetson
George Jetson Jan 09, 2022 12:54PM ET
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united states steel will go to $50 soon. $X
Ahmed Furqan
Ahmed Furqan Jan 09, 2022 10:32AM ET
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On H4 its rejection already done so i think its must be turn to go up to 1810 and thn decide to low or high.....am i right or wrong...
Barani Krishnan
Barani Krishnan Jan 09, 2022 10:32AM ET
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Ahmed, it is certainly on the fence, as Sunil jee of skcharting says
SunilKumar Dixit
SunilKumarDixit Jan 09, 2022 10:32AM ET
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Ahmed. The minor trend does consist of 1790-1804 with outer ring at the mercy of 1782 which itself looks fragile. All the same, major action is likely to be seen how the metal is treated at 1797-1804. On the good side bulls will be trying for 1825-1835 while bears keep vying for retest of 1782 and 1768 which has potential to open gates to 1753
Ahmed Furqan
Ahmed Furqan Jan 09, 2022 10:32AM ET
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thanks to both for guiding...
jj mm
jj mm Jan 09, 2022 10:29AM ET
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Gold up to 1850
Barani Krishnan
Barani Krishnan Jan 09, 2022 10:29AM ET
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But it has to cross 1830. That's a big wall of resistance there.
Shep De
Shep De Jan 09, 2022 9:41AM ET
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Gold is about to go nuts #Inflation #Uncertainty #Dollar #Rates People like to THINK rising rates is negative to gold. You about to trade in your now trading philosophy
Barani Krishnan
Barani Krishnan Jan 09, 2022 9:41AM ET
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If gold holds true to its inflation-hedge premise, it should be trading at a 2.5 multiple now.
Manu Seth
Manu Seth Jan 09, 2022 8:38AM ET
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Monday xauusd up or down?
Barani Krishnan
Barani Krishnan Jan 09, 2022 8:38AM ET
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Hard to say, though I reckon nearby $1,800 will hold.
SunilKumar Dixit
SunilKumarDixit Jan 09, 2022 8:38AM ET
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Expect somewhat choppy week. Price behavior will broadly depend on how traders react to 1798
Abdelraziq Abuaisha
Abdelraziq Abuaisha Jan 09, 2022 8:24AM ET
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Next week will be the release of inflation data ,, I guarantee and the one absolute guarantor is Almighty Allah, we’re gonna see a very lovely pumpy ride on Gold on Wednesday and the days after till the close of weekly session. Put your seat belt because we’re gonna have a lot of fun:).
Barani Krishnan
Barani Krishnan Jan 09, 2022 8:24AM ET
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Wishing the best for you and your positions in the week ahead, Abdelraziq.
SunilKumar Dixit
SunilKumarDixit Jan 09, 2022 8:24AM ET
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Abdelraziq. You have a good point here. Nonetheless, Gold has made more enemies than friends.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Jan 09, 2022 8:24AM ET
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According to the readings of the previous releases Gold dominated. I build my opinion on facts. Besides I would be so happy to see him crushing his enemies over and over till it prevails; as the son cannot be hidden by shadow:)
Tom Sc
Tom Sc Jan 09, 2022 8:11AM ET
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like the Fed now is calling for 6 or 7 rate hikes in 2022/23 .....let's remember they originally said, at the very beginning, no hikes until late 2023/early 2024! they also said inflation will be "slightly over 2% target" and now we are at 7%. So, I'm not convinced and I think gold traders could become not convinced either and may start pricing in a reversal of policy. imagine the FED raises rates 0.25% and stops QE in March but does nothing else the rest of the year? I see that as a strong possibility. what is all this urgency coming from? are they deathly afraid of inflation suddenly or is Powell trying to sink Biden for the midterms, right after he confirmed him for another 4 years because it seems like the Fed was indifferent for awhile and now they even want to shrink the balance sheet? where did this come from all of a sudden?
Gus McCrae
Gus McCrae Jan 09, 2022 8:11AM ET
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normally it would comes front he fact that everyone wanted to tighten policy but for a powerful one at the table. once that powerful one gives up or is no longer so powerful then the consensus approach emerges seemingly suddenly but in reality it was just lurking under the surface. that powerful one could have been Biden or Powell or someone else. who knows
Tom Sc
Tom Sc Jan 09, 2022 8:11AM ET
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I think these people just think they are so effing smart that they can just pull this lever and that lever and engineer this thing perfectly but they may be in for a suprise when inflation doesnt drop as they expected. many companies have raised prices into the new year, wages are rising too (albeit not fast enough to keep up) but those should keep rising too in the short term so not sure where the drops in CPI they expect will come from.
Barani Krishnan
Barani Krishnan Jan 09, 2022 8:11AM ET
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Tom Sc  It's really intriguing the path Powell has put us on and now wants to take us. Let's see how it plays out.
SunilKumar Dixit
SunilKumarDixit Jan 09, 2022 8:11AM ET
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There is an old man with a printer. That says a lot 🤣
 
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