Inflation fear gets the attention in the Commodities sector

Inflation is attracting attention; last week equities and commodities rose, as the EuroZone debt issues faded on successful bond auctions from the EU's small members.

The 4% rise of the Euro vs the UDS, gathered momentum following the ECB's Jean Claude Trichet's tough inflation remarks, seeming to signal the chance of a rate rise earlier than the market may have thought.

EU inflation rose to 2.2% in December, the fastest pace since Y 2008, and is now above the ECB's ceiling of 2%.

Commodities, that had retraced during the 1st week of January, recovered with the Reuters Jeffries CRB index charging North, and almost reaching a 50% percent retracement of the Y's 2008 to 2009 sell off. Strong rallies in Agricultural and Energy products put the index 2.3% higher at Friday's close.

Gold and Silver are working to gain traction again over the last 2 weeks. Lessened concern about the EU's sovereign debt, stock market gains and a shifting focus toward cyclical commodities, such as energy and base metals, have undermined some of the Strong support seen over the last 6 months.

The speculative Long position in both precious metals has seen a continued reduction over the past 3 months while ETF investments have lessened a bit too.

Silver has under-performed Gold by 3% recently, and is now range bound between 28 to 30 oz, and Gold is trading in a range between 1,350 and 1,400. A clear break below either of those 2 lows increases the risk for more position squaring IMO.

Energy prices recovered from the selling during the 1st week of January on the back of various supply considerations.

A report on the Gulf of Mexico leak last year could herald a new, and more costly era for offshore drilling there with some projects being delayed, causing a reduction of supply to the US market.

European Brent Crude looks set to be the 1st to test the 100 bbl mark as it continues to trade at a wide premium over WTI crude.

This week it tapped at 98.85 bbl with the premium over March WTI rising to 6.00 bbl.

Supply disruptions and cold weather in Europe combined with high inventory levels at Cushing, the delivery hub for WTI crude, has caused the widening of the spread.

Some analyst are now saying that the price of Brent Crude Oil is a better reflection of the current Global demand, and threatening WTI Crude's status as the Global benchmark price.

What is clear is that Global demand rose during Q-4 of Y 2010 and projections for growth in Y 2011 point towards a Global increase in demand, and the excess capacity OPEC is in no hurry open the valves, hence OPEC holds the Key on how the price will act in the months ahead.

The 90 bbl level is the pivot point for WTI Crude with the recent highs at 92.60 marking resistance, and the support is at the December and January lows; 87.10 bbl.

The Overall Technical Outlook

Comex Gold (GC)

Gold's recovery from 1352.7 finished at 1392.9, and then fell sharply after failing to hold above 4 hours 55 EMA.

This action suggests that the fall from 1424.4 is resuming, and the initial bias is to the Southside this week and a clear break of 1352.7, Key support, will confirm this Bearish sentiment and target 1329, Key support, for confirming a medium term reversal.

On the Upside: a clear above 1392.9 will turn the bias back to the Northside for a move to 1424.4 and higher IMO.

The Big Picture: the rise from 1155.6 is treated as the 5th wave of the 5 wave sequence from 1044.5, which should also be 5th wave of the rally from 681, the Y 2008 low.

Note: Again, Gold is close to 2 important projection targets, 161.8% projection of 931.3 to 1227.5 from 1044.5 at 1449.6 and 100% projection of 253 to 1033.9 from 681 at 1462.

A clear break of 1329, Key support, signals that 1424.3 is an important Top, and Gold should have started a medium term correction that may dip back into 1044.5/1227.5 support Zone on the move.

The Long Term Picture: the rise from 681 is treated as resumption of the long term up-trend from the Y 1999 low of 253. 100% projection of 253 to 1033.9 from 681 at 1462 is close to being hit, and a correction is likely on he horizon. But, even in case of deep fall, 55 months EMA, now at 964.3, should present Strong support to contain the downside and bring on the resumption of the up-trend. Stay tuned...