Talking Points

  •  Crude Oil Looks to Italian Budget Vote for Bearing on Risk Trends
  •  Gold Caught Between Sentiment's Impact on US Dollar, QE3 Outlook

WTI Crude Oil (NY Close): $95.52 // +1.26 // +1.34%

Crude oil prices followed the S&P 500 to close higher in New York on Monday, with the WTI contract outperforming on rising geopolitical fears ahead of an IAEA report tipped to reveal Iran's nuclear program is geared toward military purposes. The report is tentatively scheduled to be released Tuesday or Wednesday and is likely to underpin prices for now as traders ponder what (if any) supply disruptions can result from the international community's would-be actions against Tehran on the back of its findings in the days ahead.

Turning to the risk sentiment landscape, all eyes are on Italy as the government submits its 2010 budget for review vote in Parliament. While the poll itself is largely procedural, markets are looking at the vote tally to see if Prime Minister Silvio Berlusconi retains a governing majority. If he fails, a confidence motion will likely follow that couldsink the administration. For their part, the markets are most worried about a political vacuum that holds back implementation austerity measures. With that in mind, the immediate concern is not whether Berlusconi goes or stays, but rather if whatever government is holding the reins in Rome is able to be effective.

On balance, this presents traders with four scenarios. If Berlusconi secures a relatively comfortable victory or if a failure to do so leads to a swift transition of power to an effective care-taker government able to push through austerity, crude oil is likely to see a lift along with the spectrum of risky assets. Alternatively, a narrow victory for the Prime Minister that falls short of mollifying investors' concerns about his ability to govern or the fall of the sitting government that brings early elections - which would prolong uncertainty - is likely to have the opposite effect.

Looking at the technical ladscape, prices broke resistance at $94.87, the 50% Fibonacci retracement level. The bulls now aim to challenge the 61.8% boundary at $99.57, although early signs of negative RSI divergence suggest upside momentum is fading and hint a blow-off top may be in the works. The 50% Fib level as been recast as near-term support.

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Spot Gold (NY Close): $1795.10 // +40.45 // +2.31%

As we discussed yesterday, gold is caught between the conflicting influences of store-of-value demand - both on the back of re-emerging QE3 expectations and fears of a meltdown in the Euro Zone - and the transmission of sentiment trends via the US Dollar. Needless to say, this puts the spotlight on the Italian budget vote over the next 24 hours, although a handful of speeches from Federal Reserve officials will be important to watch as well.

In Italy, a risk-positive outcome (as described above) is likely to amount to downward pressure but losses will be capped by the concurrent decline in the US Dollar amid fading safe-haven demand, amounting to a de-facto lift for the yellow metal. Needless to say, the opposite would be likely in the opposing scenario, although both outcomes may lack for directional conviction until a bearing on US monetary policy is provided by comments from Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser.

Both policymakers are known hawks that dissented with the FOMC's August and September decisions to announce a time frame for low interest rates and launch the so-called Operation Twist. Both also conspicuously didn't dissent in October, and the markets will be keen to learn whether this was because no new easing was announced or if they had come to see greater headwinds facing the economy and fallen in line with Chairman Ben Bernanke. If they remain hawkish, the status quo will be maintained, but if dovish cues emerge the markets are likely to see QE3 as comparatively more likely, encouraging gold prices upward.

Taking stock of the chart setup, prices are testing resistance at $1794.76, the 76.4% Fibonacci extension level. A break higher exposes the measured extension target at $1829.85. Near-term support lines up at $1773.05, the 61.8% barrier reinforced by a minor rising trend line, with a break below that targeting $1755.50.

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Spot Silver (NY Close): $34.96 // +0.80 // +2.34%

While the outlook for silver hinges on the precarious balance between alternative store of value demand and the direction of the US Dollar along similar lines to gold, the generally more speculative nature of the cheaper metal is likely to make it less attractive as a safe haven unless the likelihood of QE3 appears to grow. This puts the spotlight squarely on comments from the Fed's Plosser and Kocherlakota.

The technical landscape has been little-changed over the past two weeks. Prices continue to consolidate above the $33.00 figure, which closely coincides with the 38.2% Fibonacci retracement and 14.6% extension levels. A break lower targets the 23.6% extension at $31.39. Alternatively, a push through resistance exposes $37.25.

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