Talking Points

  •  Crude Oil, Copper Rise with Risky Assets After ECB LTRO Results
  •  Gold and Silver Underperform as US Dollar Yields Mixed Response

Commodity prices are inching higher after the ECB allotted €529.5 billion via its second 3-year LTRO, topping expectations for a €470 billion result. As we discussed previously, the outcome is broadly positive for the global economic growth outlook in that it downgrades the threat of a Eurozone-driven global credit squeeze. With that in mind, it seems to make sense to see the cycle-sensitive crude oil and copper prices higher following the outcome.

The response from gold and silver has been more nuanced, reflecting conflicted forces pulling on the US Dollar. We expected LTRO to boost purely sentiment-driven currencies like the Australian, Canadian and New Zealand Dollars against the greenback while weighing on the Euro. Indeed, in practical terms, LTRO is not materially different in its effect than the credit expansion achieved by the Fed with its QE and QE2. This means it's not unreasonable to expect the ECB's efforts to weigh on the single currency much the same as those of Ben Bernanke and company hurt the Dollar.

The aftermath of LTRO has largely validated these expectations, producing a net muted reaction from the US currency. By extension, precious metals have lagged. The yellow metal is underperforming, reflecting the lingering inverse relationship between the gold/silver ratio and the S&P 500. The divergence appears likely to continue as the spotlight shifts to Federal Reserve Chairman Ben Bernanke as delivers his semi-annual testimony to Congress. If the central bank chief softens his dovish rhetoric in line with we heard from other policymakers last week, QE3 bets will probably take a significant hit.

On balance, such an outcome is likely to weigh on precious metals amid scaled-back demand for an alternative to fiat while boosting US recovery expectations and stoking directly growth-linked assets (including oil and copper) higher. A pickup in February's Chicago PMI gauge and signs of further cautious improvement in the Fed's Beige Book survey of regional economic conditions stand to encourage this dynamic.

WTI Crude Oil (NY Close): $106.55 // -2.01 // -1.85%

Prices followed a Bearish Engulfing candlestick pattern below resistance at 110.04, the 61.8% Fibonacci extension, with a break below initial support at 106.70 (the 50% Fib extension). Sellers now target the 38.2% retracement of the 2/2-2/24 up leg at 104.38, followed by the 38.2% extension at 103.34. The 106.70 has been recast as near-term resistance.


Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1784.23 // +16.55 // +0.94%

Prices rebounded from 1763.00, the confluence of former resistance at the December 2 high and the 23.6% Fibonacci extension, apparently neutralizing a bearish Three Outside Down candlestick pattern completed yesterday. The bulls now look to challenge the 1800/oz figure, a barrier reinforced by the 38.2% extension level.A daily close above this level targets the 50% extension at 1824.91. Importantly, negative RSI divergence continues to warn that of fading upward momentum.


Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $36.91 // +1.52 // +4.30%

Prices cleared resistance at 35.66, the October 28 swing high reinforced by the 38.2% Fibonacci extension level with the bulls now testing above the next upside barrier at 36.99. This level is marked by the confluence of the August 9 low and the 50% extension. A break higher targets the 61.8% extension at 37.79. The 35.66 level has been recast as near-term support.


Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.922 // +0.032 // +0.82%

Prices are testing above resistance at 3.909, with a break higher exposing the February 9 high at 3.988. This level doubles as the top of a Bearish Engulfing candlestick pattern, with a daily close above it needed to neutralize otherwise bearish hues in overall positioning. Near-term support remains at 3.789 for now.


Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for

To contact Ilya, e-mail Follow me on Twitter at @IlyaSpivak