Talking Points

  •  Crude Oil Likely to Rise as Risk Appetite Recovers on Earnings, EU Bailout
  •  Gold Anchored to US Dollar's Fortunes, May Gain if Risk Appetite Holds Up

WTI Crude Oil (NY Close): $85.30 // -0.81 // -0.94%

Crude oil remains firmly anchored to underlying risk appetite, showing a firm correlation with the S&P 500. This hints that little by way of meaningful directional momentum is likely for the last hours of the trading week, with investors across financial markets shying away from expressing firm conviction before the weekend's EU debt crisis summit.

Importantly, this is not to be confused with a lack of volatility. Indeed, traders have been quick to cling to headlines out of the Euro Zone, making for particularly choppy price action as risk appetite seesaws from one end of the spectrum to the other. An empty US economic calendar reinforces the possibility that more of the same is on tap. With that in mind, futures tracking the S&P 500 are trading higher ahead of the opening bell on Wall Street, hinting the path of least resistance narrowly favors the upside for shares as well as the WTI contract.

On the technical front, things look relatively grim compared to the somewhat rosy short-term fundamental landscape. Prices put in a Bearish Engulfing candlestick pattern below resistance at 90.10, arguing for a downward reversal from here. Initial support stands at 84.61, the 23.6% Fibonacci extension level. A break below that exposes the 38.2% Fib at 80.97.

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Spot Gold (NY Close): $1620.80 // -19.95 // -1.22%

We have long argued that gold (and precious metals in general for that matter) have been attractive for two reasons since the onset of recovery following the 2008 Great Recession: for the bulls expecting a strong rebound, there was demand for an inflation hedge; for the bears expecting growth to falter anew, there was desire for an alternative store of value to protect against another market-wide meltdown. In the event that global growth is neither hot nor cold but lukewarm however, the yellow metal loses out to more liquid, higher-yielding assets.

Gold and silver's stark underperformance against the US Dollar as compared to fiat currencies seems to reflect that markets are increasingly coming to terms with the idea that the lukewarm scenario is the most likely. Data on economic surprises compiled by Citigroup proves telling, showing the pulse of fundamental data in the US has been steadily improving since early June while analogous measures from the Euro Zone and China - the other two major drivers of global growth - have underperformed (in the case of Europe, woefully so). The world economy is thereby increasingly propelled forward by on one of its three key engines, albeit the largest one.

On balance, this points toward the probability of a slowdown but equally suggests a double-dip recession is not to be, hinting gold is likely to broadly underperform for the time being. Needless to say, this outlook is not without risks, as a poorly managed default in Greece (to take but one example) could dramatically alter the landscape and buoy the yellow metal anew. For the time being however, this doesn't appear to be the path of least resistance.

Sizing up the technical landscape, prices broke below support at 1638.11, the intersection of the 14.6% Fibonacci extension and a rising channel carved out since late September, with the bears now challenging the 23.6% Fib at 1603.16. The 14.6% Fib has been recast as near-term resistance.

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Spot Silver (NY Close): $30.60 // -0.56 // -1.81%

As with gold, the foundation for silver investment demand appears to be giving way as the global growth outlook moderates from the bullish and bearish extremes favored as recently as two months ago. On the technical side of things, prices have now broken below support at $30.98, the 14.6% Fibonacci extension. Sellers now aim to challenge the 23.6% boundary at $29.42, with the 14.6% level recast as near-term resistance.

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