Talking Points

  •  Crude Oil Prices Look to Fed's Ben Bernanke Speech to Define Direction
  •  Gold Outlook Clouded as Inflation, Sentiment-Driven Catalysts Conflict

WTI Crude Oil (NY Close): $85.30 // +0.14 // +0.16%

Needless to say, all eyes are now on Federal Reserve Chairman Ben Bernanke as the he delivers his much-anticipated speech at the central bankers' symposium in Jackson Hole, Wyoming. Markets appear positioned for the unveiling of further stimulus, with S&P 500 stock index futures scoring healthy gains overnight. Such an outcome would naturally bode well for crude, with prices bolstered along with the spectrum of growth-sensitive assets by the prospect of added support for the sagging economic recovery.

Traders waiting for the Fed to come riding to their rescue may be due for a disappointment however. When Mr Bernanke began to unveil QE2 at last year's Jackson Hole sit-down, the central purpose was to ward off deflation expectations. A year on, medium-term inflation expectations (as reflected in bond yields) are down over 25 percent, putting the policy's success in question.

Meanwhile, the unprecedented move to define the extended period through which rates will remain exceptionally low at the last FOMC meeting as mid-2013 may have been the beginning of a new, post-QE approach to stimulus. The announcement gave firms and investors a clearly defined window to capitalize on low borrowing costs and enough lead time to plan to do so. This seems like a clear attempt to offset the largest perceived problem with the effectiveness of QE in spurring the private sector out of complacency: the inherent uncertainty surrounding the use of a new, unorthodox policy tool.

We noted yesterday that prices put in a bearish Dark Cloud Cover candlestick pattern, hinting a move lower is ahead. So far, prices have (perhaps understandably) yielded little follow-through, with a Doji produced on the latest bar. Broadly speaking, yesterday's range remains intact, with near-term support and resistance at $83.89and $85.83, the 38.2% and 23.6% Fibonacci retracement levels respectively.

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Spot Gold (NY Close): 1774.15 // +14.83 // +0.84%

The central conflict between the fundamental drivers of gold demand heading into Bern Bernanke's speech at Jackson Hold that we pointed out yesterday remains intact. On one hand, the unveiling of new stimulus measures promises to stoke risk appetite and would be expected to drive gold lower as capital flows abandon safe-haven assets. However, it will also renew medium- to long-term inflation fears so prevalent while QE2 was in effect, reviving gold's allure as an inflation hedge. Naturally, the reverse is likewise the case: no further accommodation points to an anchored price growth outlook that erases the need for an inflation hedge but threatens a return to risk aversion that sends safety-seeking flows back into the yellow metal.

Faced with such ambiguity, investors took profit on a fair bit of long gold exposure, pushing prices down 4.8 percent so far this week and sending ETF holdings to the lowest level since the beginning of August. Needless to say, where things go from here will be in the hands of the Fed chairman. On the technical front, prices completed a Hammer candlestick above support at $1746.19, the 38.2% Fibonacci retracement level, hinting a corrective upswing may be ahead after the metal took out rising trend line resistance two days ago. The initial upside barrier from here stands at $1809.48, the 23.6% Fib.

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Spot Silver (NY Close): $41.09 // +1.36 // +3.42%

The fundamental ambiguity of gold seems to be likewise reflected in silver, with the outcome of the Ben Bernanke's Jackson Hole speech now in focus. Prices put in a bullish Piercing Line candlestick pattern above support at the intersection of the 76.4% Fibonacci retracement level and an Andrew's Pitchfork bottom ($38.70). Resistance from here stands at $41.45, the 38.2% Fib, while immediate support is at the 50% level ($40.60).

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