Talking Points

  •  Crude Oil to Rebound if FOMC Steps Up Dovish Rhetoric
  •  Gold Outlook Hinges on Fed Growth, Inflation Forecasts

WTI Crude Oil (NY Close): $81.31 // -5.57 // -6.41%

All eyes are now fixated on the upcoming Federal Reserve monetary policy announcement, with a cautious recovery in S&P 500 index futures ahead of the opening bell on Wall Street hinting traders are looking for a supportive gesture from the central bank.

While a headlong plunge into a "QE3"-type program seems unlikely after last week's better-than-expected US jobs report, a change in language that pushes out the prospect of rate hikes even further than the current pledge to keep borrowing costs low for an "extended period" seems reasonable. An adjustment to the make-up of Treasury bond maturities purchased as the Fed reinvests proceeds from securities already on its balance sheet to target longer-term yields may also be on the table.

With most risky assets now arguably in oversold territory, such gestures from Ben Bernanke and company ought to engineer a bounce in shares and well as growth-geared commodities, which naturally includes the WTI contract.Prices are testing major support at $75.46, the 50% Fibonacci retracement of the rally from the major post-crisis March 2009 low, with a bounce seeing the first layer of significant resistance at $84.72 (the 38.2% Fib).

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Spot Gold (NY Close): 1719.53 // +55.72 // +3.35%

Gold continues to race higher, feeding on safe-haven demand as global slowdown fears reach fever pitch. As we've discussed at length before, the yellow metal thrives on extremes in investors' perception of the global recovery: expectations of a particularly swift rebound drive demand rooted in a desire for an inflation hedge, while forecasts calling for a double-dip recession drive capital inflows seeking an alternative store of value as "paper" assets sink. Clearly, in the current environment, the latter scenario is playing out.

With this in mind, the upcoming Federal Reserve policy meeting may prove detrimental as prices tower just south of the $1800 figure. The markets are positioning for an accommodative tone, which stands to boost risk appetite over the short term and force a correction lower in gold prices as gold retreats. Any significant revisions to the Fed's growth and inflation outlook ought to prove even more interesting however. If these point to a growth outlook favoring slow but positive growth, risky assets are likely to resume their decline as traders re-price future demand and earnings expectations but gold may no longer benefit, outmatched by more liquid and higher yielding safe-haven alternatives.

Prices are testing above the Fibonacci extension measured target at $1745.97 implied by the advance from the late January low and subsequent May-July retracement. While the momentum behind the move higher is undeniable, increasingly overbought RSI readings warn that a sharp pullback may be in store, although no actionable evidence of such an outcome in the near term is apparent for now. A break above $1745.97 exposes the $1800/oz figure, followed by the 123.6% level at $1809.27. The $1700 figure is now near-term support.

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Spot Silver (NY Close): $39.02 // +0.67 // +1.75%

Prices are inching below support at $38.88 - the intersection of a rising trend line set from the July swing low and the 38.2% Fibonacci retracement level - to challenge the 50% Fib at 37.83. A break below this barrier exposes $36.78. Silver shows weak links with go-to indicators of risk appetite and its relationship with gold has come apart as well. With that in mind, the trajectory of the US Dollar in the aftermath of the Federal Reserve policy announcement may prove to be leading driver of price action.

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