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Precious Metals & Energy - Weekly Review and Outlook

CommoditiesJan 23, 2022 07:32AM ET
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By Barani Krishnan

Investing.com -- Last weekend, I wrote about how irrational exuberance unduly escalates asset values, taking a page from the 1990s speech of Federal Reserve legend Alan Greenspan, to shine a light on the oil market which racked up double-digit gains in the first two weeks of the year on more hype than fact.

Since then, U.S. stocks have plunged at a rate that could make January the worst month since the October 2008 height of the financial crisis. Crude prices did fall as much as 5% initially on Friday in sympathy with Wall Street, but pulled back later to end the day just 1% lower and up for a fifth straight week. Aside from Greenspan, I was reminded this week of the wisdom of John Maynard Keynes who said, “Markets can remain irrational longer than you can remain solvent”. We shall just have to see how long the irrationality lasts with oil.

This week, we shall review the moves in gold, which seem a little too rational for the liking of longs in the precious metal. To me, that's good because gains built over time are likely to stick more than the lightning spikes achieved at the pinnacle of market exuberance.

In what some are already calling “The Year of the Great Inflation”, gold could just be the asset to shield investors from price pressures growing at their fastest pace in four decades and to give investment portfolios that little extra shine.

But do not expect its moves to be commensurate with inflation.

If anything, gold in 2022 will likely gain by moving two steps forward and one back, much like how it has behaved since the start of January.

In motion picture analogy, think of a slow-mo clip instead of a blazing trailer. That will characterize gold’s moves these days compared with recent years.

Anyone buying the yellow metal as an inflation hedge and expecting a rerun of the pace that took it to record highs two years ago might be disappointed, to say the least.

Since the start of January, gold has gained just $13, or 0.6%, in the name of inflation.

Gold’s moves in 2022 seem almost pedestrian when compared with the lightning pace at which it often fell last year, ending down 3.6% for its first annual dip in three years, and the sharpest slump since 2015.

The difference is even more dramatic when compared with 2020. That was gold’s most glorious year in a decade when it went from a March low of $1,485 an ounce to an all-time high of just over $2,121 by August. It, of course, gave back a portion of those gains later, with stunning drops over three months before another bumper gain in December.

Gold’s progress may seem “unexciting” now but it stands out for one thing: the ability to stay in the $1,800 territory, despite pressure from the two-year highs in U.S. Treasury yields and the accompanying rally at times in the dollar - both of which act as “twin evils” to gold.

The yellow metal has shown resilience despite expectations that the U.S. Federal Reserve will embark on a series of interest rate hikes this year to combat 40-year highs in inflation, which grew by 7% in the year to December, according to the Consumer Price Index. Rate hikes are typically beneficial to the dollar and negative to gold.

Gold also smashed past the key $1,830 resistance this week to reach a two-month high above $1,848.

For six previous weeks, since early November, the $1,830 level was almost like an impregnable fortress to gold bulls.

Now, there appear to be just three more resistance points for gold longs to clear in their quest to reach the next major level of $1,900 - a level it hasn’t touched since May. Those resistance points are $1,860, $1,880 and $1,899.

Will it reach those points faster or continue crawling toward them?

We shall see.

Gold Price & Technical Outlook

Gold futures’ most active contract on New York’s Comex, February, settled Friday’s trade down $10.80, or 0.6%, $1,831.80.

For the week though, it rose 0.8%.

Gold also hit a 2-month high of $1,848.50 on Thursday.

Sunil Kumar Dixit, chief technical strategist of SKCharting.com, said the price action over the week showed strong momentum for gold to surpass the $1,830-$1,835 wall to test the $1,848 level, supported by bullish stochastic signals on the daily, weekly and monthly charts.

Gold’s Relative Strength Index was also positioned on the stronger side, he said.

On the negative side, the dollar’s rebound on Friday capped gold’s rise, pushing it to a weekly close at $1834 (down $14 from a high of $1848) but $29 above the week's low of $1805.

“In the week ahead, we can expect a sideways distribution of momentum with bearish consolidation, as a bearish reversal top is spotted on the daily chart. That won't change the main trend but it may start a short-term correction toward the 38.2% Fibonacci level of $1,825 and the daily middle Bollinger Band of $1816."

Importantly, Dixit said, a weekly close above $1,825 is critical for gold to maintain uptrend as failure will extend correction to 50% Fibonacci level of $1797.

Oil Market Activity

Crude prices notched a fifth straight weekly win after a preliminary plunge that was alleviated before the close, as longs bought the dip.

The dive earlier in the day was triggered by worries about U.S. gasoline inventories piled up over the past three weeks and Wall Street’s worst weekly rout since the coronavirus pandemic. To some, it was a sign that prices closer to $90 a barrel may ultimately create more headwinds for crude, though the majority of oil longs seemed determined to push ahead with the rally.

Crude is already running into resistance on its way to $90 and losing momentum, noted Craig Elam, analyst at online trading platform OANDA. “It's a big psychological barrier as once that goes, people are just counting down the days until we have triple-figure oil,” he said, referring to forecasts for $100 a barrel. “It's a big deal.”

U.S. gasoline stocks rose almost 6 million barrels last week and ballooned by a record 24 million barrels over a three-week period amid seasonally-weak demand that contrasts with the rally in global oil prices, data from the Energy Information Administration showed Thursday.

The data suggests that demand for gasoline, America’s preeminent fuel product, has cratered since the end of holiday travels for the 2021 year-end.

U.S. refiners also appear to be turning a surfeit of crude into gasoline while the Omicron variant of the coronavirus was reducing some of the regular driving, work-commuting and other activities that required fuels.

U.S. crude oil itself saw a stockpile rise for the first time in eight weeks, rising 515,000 barrels last week, after a 4.55 million decline the previous week. Crude stockpiles are down by just around 6 million barrels over the past three weeks, explaining only partly the current balance of gasoline in the market.

U.S. inventories of oil distillates, which are refined into diesel for trucks, buses, trains and ships as well as fuel for jets, meanwhile fell by 1.431 million barrels last week after an increase of 2.54 million the previous week.

Wall Street saw its worst hammering this week since the Covid outbreak of March 2020 as investors tried to bring down across-the-board valuations of stock prices bloated during the two-year pandemic. The selloff was also triggered by fears of the first impending pandemic-era rate hike by the Federal Reserve, battling to fight inflation that is running at 40-year highs.

Crude Price & Technical Outlook

The West Texas Intermediate benchmark for U.S. crude settled down 41 cents, or 0.5%, at $85.14 per barrel. Earlier in Friday’s session, WTI tumbled more than $4, or 5%. On Wednesday, it hit a seven-year high of $87.91. It remains up more than 1% on the week, accumulating around 20% over the past five weeks.

London-traded Brent, the global benchmark for oil, settled down 49 cents, or about 0.6% lower, at $87.89 per barrel. Brent remained up 2% for the week, and around 20% higher too over the past five weeks, after hitting a seven-year high of $89.48 on Thursday.

Dixit of SK Charting noted that WTI broke through the multi-year high of $85.40 and tested $87, a peak not seen since November 2014, before profit-booking by retail traders for a weekly settlement of $85.14.

“Going into the week ahead, we may see some cooling off in the heated momentum and price correction towards $82, and the extended correction may reach the horizontal support areas of $80 and $78 and the weekly middle Bollinger Band of $76.50,” said Dixit.

Otherwise, continued strength and consolidation above $85.50 could prompt WTI to retest $87, extending gains toward $89 and the much-awaited $90 psychological handle, he said.

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 (10)
Jay Garrelts
Jay Garrelts Jan 23, 2022 3:01PM ET
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I invested in some precious metals bought me some of that bitcoin today show where do you go to get it do they like ship it to you or what?
HD HD
HD HD Jan 23, 2022 11:29AM ET
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buy $silver !
ELLIOT MILLER
ELLIOT MILLER Jan 23, 2022 11:19AM ET
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How about natural gas???
Barani Krishnan
Barani Krishnan Jan 23, 2022 11:19AM ET
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From Sunil. who collaborates with me (as of Thursday): Sunil Kumar Dixit, chief technical strategist at skcharting.com, said gas prices could be headed a little lower based on chart action, notwithstanding the push higher than storage draws normally provide. The back-and-forth indicates more volatility ahead. If the 50-week Exponential Moving Average of $3.963 on Henry Hub’s spot month holds, a short-term bounce towards the previous week's close of $4.332 and the weekly middle Bollinger Band of $4.750 may be seen, Dixit said. “But weakness below the 50-week EMA of $3.963 may push gas prices lower towards the horizontal support of $3.68 and the 100-week Simple Moving Average of $3.050,” he added.
SunilKumar Dixit
SunilKumarDixit Jan 23, 2022 11:19AM ET
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Nat Gas closed for the week with a bearish bias but still in the window of time for ample room to move sideways on a broad scale.
Abhay Agrawal
Abhay Agrawal Jan 23, 2022 9:26AM ET
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barani ji ,the fed rate hike which the Market is anticipating will not be excuted as quickly as because the debt on USA is so massive that faster rate hike will result in market crash and global recession which no countries can afford in the current environment of pandemic
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Barani Krishnan
Barani Krishnan Jan 23, 2022 9:26AM ET
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Abhay Agrawal  Inability to accept doesn't absolve markets from ultimately adjusting to reality. There will be an equilibrium, of course, and the Fed will be closely monitoring both market temperature and the economy to achieve that. The next couple of months will be most interesting. I expect Powell to reiterate his "accommodative tightening" mantra through the cycle.
SunilKumar Dixit
SunilKumarDixit Jan 23, 2022 9:26AM ET
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The initial episodes Hawkish actions by the Fed may have been partially factored in by the markets still leaving some room for reactions. The impending correction might come in waves than straight. Markets are supposed to make adjustments naturally than taking a shock out of the blue.
Barani Krishnan
Barani Krishnan Jan 23, 2022 9:26AM ET
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SunilKumar Dixit  Spot on, Sunil. One step forward and two back is how it will be. Let the games begin! :)
Abhay Agrawal
Abhay Agrawal Jan 23, 2022 9:26AM ET
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SunilKumar Dixit sunil sir could 1700 possible till march 2022
SunilKumar Dixit
SunilKumarDixit Jan 23, 2022 9:26AM ET
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Abhay. Atm, Gold has broken above 1830-1835 after a long consolidation. Nonetheless, short term balancing act can bring the metal to 1825-1816 1700 and retest of 1680 would require considerable weakness below 1805 and 1798 which marks 50% Fibonacci level. Whether Gold clears 1860 and tests 1880-1900 or breaks below 1805-1797 and plunges to 1715-1680 yielding to triple bottom, would largely depend on how hawkish the Fed's actions are and how traders react to the key fibonacci levels, 1825 & 1798
Ma Lu
Ma Lu Jan 23, 2022 9:21AM ET
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Analysts have already set a price target of 100$ until Q3/22.
Barani Krishnan
Barani Krishnan Jan 23, 2022 9:21AM ET
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The consumer is king. OPEC will ultimately realize that.
SunilKumar Dixit
SunilKumarDixit Jan 23, 2022 9:21AM ET
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Oil has been rising in a frenzied and parabolic pace outrageously above the fair value of $50-$70 and overvalued instruments are destined to be balanced in due course, even if the spike continues for a while. $100 may be a Technical forecast, however it may not defy fundamental rules for long.
Barani Krishnan
Barani Krishnan Jan 23, 2022 9:21AM ET
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SunilKumar Dixit  Well put, Sunil. I couldn't have said better.
SunilKumar Dixit
SunilKumarDixit Jan 23, 2022 9:21AM ET
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Anything that goes up, eventually comes down, sooner than later. The crazier it rises, the harder it falls. Any overvalued asset can not remain so for good. The balloon can not defy its capacity.
MASHUM Sarkar
MASHUM Sarkar Jan 23, 2022 8:21AM ET
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thank you all
Hj Jj
Hj Jj Jan 23, 2022 8:20AM ET
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Awesome analysis and price targets. Thank you 🙏
Barani Krishnan
Barani Krishnan Jan 23, 2022 8:20AM ET
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Thanks much for the feedback and bests. 🙏
Mike Nallano
Mike Nallano Jan 23, 2022 8:12AM ET
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Inflation is higher than official numbers are state. Commodities at all are much cheaper than they should be. And the stockmarket overall is much overvalued, triggered by endless stimulus. In fact the world fiat money papers are much less worth in coming years. Doest matter what bankers or financial advisors saying...the market will clean that...sooner than later
Barani Krishnan
Barani Krishnan Jan 23, 2022 8:12AM ET
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True on both counts, except that oil is a commodity almost as important at times as the air we breathe, food we eat and water we drink. Thus, price equilibrium is critical to this commodity more than any other. I know the Saudis say their economy can only be balanced by $80 oil. But how were they managing pre-2007 when oil was between $60 and $70? The fact of the matter is that the kingdom had behaved like a welfare state and never bothered to tighten its own purse, thus expecting the market to always match its needs. Saudi Arabia's oil reserves are adequate to sustain at the current pace of drilling or even more, even at $50. They just have to be competitive with the Russians and the US. But the Saudis have always used OPEC as a tool to suppress consumers and others within the alliance (read: Iran) and hope to continue doing so, infinitely. The pandemic has taught mankind to adapt to any situation, including one where we are permanently cloistered indoors. OPEC should know that.
SunilKumar Dixit
SunilKumarDixit Jan 23, 2022 8:12AM ET
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Very well described. The Saudis want to foot the bills for their lavish and superfluous lifestyles and won't bother at fiscal management. Greed and sheer greed...
Barani Krishnan
Barani Krishnan Jan 23, 2022 8:12AM ET
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SunilKumar Dixit  Absolutely. The Saudis have turned OPEC into a risk management tool for their wasteful ways and convinced the rest of the oil producing brethren, whose needs are way below theirs, to go along.
Dara Horm
Dara Horm Jan 23, 2022 8:06AM ET
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hi have are you going with the family
Dara Horm
Dara Horm Jan 23, 2022 8:05AM ET
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