Talking Points

  •  Crude Oil May Bounce Before NFP Report
  •  Gold Could Gain on Store-of-Value Demand

WTI Crude Oil (NY Close): $91.93 // -1.86 // -1.98%

Crude prices de-coupled from the S&P 500 in yesterday's session as an encouraging ADP jobs reading failed to offset headwinds from a drop in Factory Orders and a weaker-than-expected Non-Manufacturing ISM result. Seemingly supportive DOE crude inventory figures also failed to underpin prices. Interestingly, we now notice that US economic data flow itself more than even its implications for risk appetite seems important for the WTI contract, with prices showing very strong weekly correlations to a Citibank gauge of fundamental data surprises.

With this in mind, the focus over the next 24 hours falls on US Jobless Claims figures, with expectations expecting new applications for unemployment benefits to rebound after hitting a 16-week low on the previous reading. Follow-through may be hard to come by however as markets dig in their heels ahead of Friday's all-important US Employment report. On balance, S&P 500 stock index futures are narrowly higher, and in the absence of big-ticket data an upward correction in risk appetite may prove to be enough for a bounce in crude as well, especially after four days of consecutive losses.

Prices continue to test the lower boundary of a long-term rising channel that has guided the rally since March 2009, with a break lower on a weekly basis amounting to a structural trend reversal. Near term, piercing through Fibonacci support at $92.64 has exposed $90.77. Trend-based extension studies imply the measured target for the downswing from the July 26 high is at $87.75.

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Spot Gold (NY Close): 1661.75 // +0.57 // +0.03%

Perhaps inevitably, concerns about global economic growth in the second half of the year are starting to stoke fears that the Federal Reserve will need to introduce further stimulus - already dubbed "QE3" - to give the recovery another jolt. While officials have given no indication of any such outcome, moves by the Swiss National Bank and Japan's Ministry of Finance over recent days have stoked concerns that countries will try to print their way out of slump, boosting demand for gold as an alternative store of value.

We remain skeptical of such a view. Japan and Switzerland have inflation rates below 1 percent and rely heavily on exports, making taking action to weaken their currencies both understandable and relatively sustainable from a price stability standpoint. Gold is benchmarked against the US Dollar, and clearly the US is not at all similar to Switzerland or Japan with a yearly CPI growth rate at 3.6 percent and no growth-critical export sector to protect. Still, markets are clearly on edge and fighting price action - however irrational - is hardly a recipe for success. As such, staying on the sidelines appears prudent for now.

As we pointed out yesterday, prices are testing the upper boundary of a rising channel that has guided the rally higher since mid-May 2010. Sizing up near-term positioning, RSI studies are deep into overbought territory while a Doji candlestick below resistance at $1664.57, the 176.4% Fibonacci extension level, points to indecision and hints a pullback is ahead. Initial support lines up at 1647.74, the 161.8% Fib. Alternatively, a push through resistance exposes the 200% level at $1691.76.

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Spot Silver (NY Close): $41.69 // +0.89 // +2.18%

Prices finally broke out of congestion, taking out 50% Fibonacci retracement resistance at $41.06 and opening the door for an advance to the 61.8% level at $43.11. As with gold, speculation about a forthcoming round of QE3 as economic slows anew may prove supportive, but barring something particularly unexpected over the next 24 hours price action is likely to be relatively subdued as markets wait for Friday's NFP report as the next major inflection point. The 50% Fib level has been recast as near-term support.

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