Talking Points

  •  Crude Oil Awaits FOMC Outcome at Critical Technical Support Level
  •  Gold, Silver to Decline if Federal Reserve Falls Short on New Stimulus

WTI Crude Oil (NY Close): $86.92 // +1.11 // +1.29%

As we suspected yesterday, crude prices edged higher yesterday in anticipation of the Federal Reserve monetary policy announcement due on Wednesday, with hopes running high that Ben Bernanke and company will offer another round of stimulus to bolster the shaky economic recovery. As we pointed out earlier, we suspect policymakers will fall short of another round of asset purchases (a so-called QE3), with the most aggressive step to be undertaken being an approach dubbed Operation Twist.

The scheme refers to a twisting of the yield curve - a process meant to lower long-term interest rates - by directing the Fed's reinvestment of proceeds from securities already on its balance sheet toward bonds with maturities further out into the future. While it depends to be seen what such an outcome will mean for risk appetite, a key consideration for crude as the WTI contract continues to closely mirror the S&P 500, anything that does not imply a further expansion of the balance sheet seems likely to be seen as a relatively incremental and so be met with disappointing across financial markets.

On the technical front, prices are perched just above support at $84.61 - the 23.6% Fibonacci extension level - with a break below this boundary exposing the 38.2% level at $80.97 and validating the longer-term bearish implications of a Flag consolidation chart pattern. Initial resistance remains at the top of a falling channel set from early May, now squarely at the $89.00 figure.

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Spot Gold (NY Close): 1803.63 // +24.95 // +1.40%

As with crude, all eyes are on the outcome of the FOMC monetary policy meeting. An outcome that doesn't imply a further expansion of the Fed's balance sheet - which is our favored scenario - is likely to weigh on prices, eroding demand for the yellow metal as an alternative store of value to counter would-be dilution of the US Dollar's value implied by additional asset purchases.

Such a turn events would validate the technical setup, which points to the formation of a double top below the $1900/oz figure marked by a pair of Bearish Engulfing candlestick patterns. Near-term support remains in the $1702.90-1745.25 range, with resistance a rising trend line set from early June (now at $1838.16) that had previously acted as support.

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Spot Silver (NY Close): $39.79 // +0.12 // +0.31%

Positioning is little changed from yesterday, with prices wedged between support at the August 25 low ($38.73) and the 61.8% Fibonacci extension level ($40.01). While the overall technical setup points to weakness after prices completed a Head and Shoulders top below the $44.00 figure, little can be said with certainty until the outcome of the Federal Reserve policy statement crosses the wires. As with gold, anything that keeps the central bank's balance sheet static is likely to renewed selling pressure, while the introduction of aggressive new stimulus can be expected to have the opposite effect.

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