The Overall Fundamentals


Gold gained for a 2nd week running, signaling that a temporary low  was formed at 1523.9 in late December. But, it is still a bit early to  conclude that the precious Yellow metal's correction since September 2011 has  finished. After the September decline, Gold price fell another $200 in December.  This was driven by the demand for USD by European banks. As the ability of European banks to access USD funding has dried up, they  had to use the Gold market as a source to get the USD. This phenomenon led to a sharp drop in the short-term Gold lease rate  during the period. As Gold recovered some of its losses in January, it was  preceded by the recovery of the lease rate. Despite the recent rebound, Gold continues to trade at the discount to  the levels indicated by the US 10-yr TIPS yields. Should European funding pressure ease, Gold should eventually rise, at  least in compliance with the levels suggested by US interest rates. I am not too pessimistic on the liquidity issue for European banks,  especially after ECB's funding through LTRO. As President Draghi indicated at the January ECB meeting the 3-yr LTRO has  been 'providing a substantial contribution to improving the funding situation of  the banks, thereby supporting financing conditions and confidence'. So, the  recovery in the lease rate has shown that the funding pressure facing European  bank in the near-term has eased.

Gold's correction since September does not suggest any change in the  fundamentals.

Gold ETF holdings remained firm in 2-H of Y 2011. The SPDR Gold Trust, the  World's Gold ETF, recorded holdings of 40.3M oz, compared with all-time high of  42.1 in August 2011, in December last year, suggesting long-term investors are  still confident over Gold's outlook.

Central banks' Gold appetite has stayed strong and the official sector  has remained a net Gold buyer since Y 2009. European central banks have only  sold 4.8 tons of Gold so far in the 3rd year ( 27 September 2011- 26 September  2012) of the CBGA3, compared with the annual target of 400 tons allowed. This  also indicated that central banks did not feel the need to sell Gold despite  price correction.


Geo-political tensions have been directing the movement of Crude Oil prices  since the start of the year. Sanctions against Iran in condemnation of its  nuclear developments sent Crude Oil prices higher. The US has imposed sanctions  against Iran's central bank and it is highly likely that Japan and South  Korea will reduce their imports of Iranian Crude Oil.

The EU has in principle agreed ton an embargo on Crude Oil imports. But, an  EU embargo on Iranian Crude Oil imports will likely be delayed for 6 months so  that countries including Greece, Italy and Spain can find alternative supplies.

Data from the European Commission indicated that these 3 countries  accounted for 68.5% of EU imports from Iran in Y 2010. The news triggered a  sharp sell off in Crude Oil prices last Thursday and Friday.

In Nigeria, President Goodluck Jonathan will meet protesters in an attempt to  end the 4-day strike which will affect the Crude Oil industry. Crude Oil prices  should continue to move with volatility in coming months as long as geopolitical  tensions remain uncertain.

The DOE/EIA released its monthly short-term energy report last week,  suggesting the price of WTI Crude Oil would average about 100/bbl in Y 2012, up  +5/bbl from the average price last year. For Y 2013, the agency expects WTI  prices to 'continue to rise, reaching 106/bbl in Q-4 of next year.

Concerning Global Crude Oil demand/supply, the DOE/EIA expects the tightening  of World Oil markets will 'moderate in Y 2012 and resume in Y 2013′.

Crude Oil demand will likely increase +1.27 mmb, or +1.44% y/y, to 89.38  mmb in Y 2012. This, however, represents a -0.14 mmb drop from the projection  made in December.

The DOE/EIA also introduced the demand forecast for Y 2013. During the year,  consumption will climb +1.47 mmb, or +1.44% y/y, to 90.85 mmb.

On the supply side, non-OPEC supply is expected to rise +0.91 mmb, or +1.76%,  y/y to 52.76 mmb in 2012, followed by a +0.76 mmb, or +1.44%, increase to 53.52  mmb in Y 2013. The need for oil supply from the OPEC will be 30.30 mmb and 30.76  mmb in Y's 2012 and 2013 respectively.

Nat Gas has been trending lower after breaking below the 2010-low in  mid-December last year. The milder-than-normal Winter weather and the oversupply  due to Shale Gas production have been the Key reasons for the weakness in price.

The DOE/EIA reported that Nat Gas inventory dropped -95 bcf to 3 377 bcf in  the week ended 6 January. Stocks were +398 bcf above the same period last year  and +491 bcf, or 17.0%, above the 5-yr average of 2 886 bcf.

Baker Hughes reported that the number of Gas rigs fell -20 units to 791 in  the week ended January 12. Oil rigs stayed unchanged at 1191 units and  miscellaneous rigs were flat at 5, sending the total number of rigs to 1987  units. Directionally oriented combined oil, gas, and miscellaneous rigs dipped -3 units to 213 units while horizontal rigs increased +1 unit to 1161 and  vertical slipped -18 units to 618 during the week.

The Overall Technicals

Comex Gold (GC)

Gold rose to 1662.9 last week and came up against Strong resistance  from 55-Days EMA and faded.

The initial bias is Neutral for this week looking for consolidations.

Note: that break of 1643.7, Key resistance, signals  the completion of the fall from 1804.4. So, as long as 1605.7,  the minor support, holds, I favor another rise in here. A break above  1662.9 targets a test of 1804.4 next IMO. But, a break of 1605.7  dampens this Bullish POV and will turn the bias back to the  Southside for a move South to 1523.9 instead.

The Big Picture: the price actions form 1923.7 high are  viewed as a medium term consolidation pattern only. The current development  favors the case that such consolidation is finished with 3 waves down to  1523.9. Sustained trading above 55-Days EMA will affirm this. Further,  a break of 1804.4 will indicate that the long term up-trend is  resuming to mark another high above 1923.7. In case of another fall, I  will continue to expect Strong support from 1478.3/1577.4, the  cluster support zone, to contain downside to finish the consolidation and  bring up trend resumption sooner or later. But, a clear break of 1478.3  indicates that deeper correction will be seen through 38.2% retracement of  681 to 1923.7 at 1449.

The Long Term Picture, with 1478.3 support intact, there is no change in the  long term Bullish outlook for Gold. Some medium term consolidation cannot  be ruled out, but I anticipate the eventual break of 2000,  the psych mark, in the long run. Stay tuned...

Comex Gold Continuous Contract Monthly Chart

Comex Silver (SI)

Silver rose to 30.675 last week forming a temporary top, and faded.

Initial bias in Neutral this week for some consolidations.

Note: the break of 30.21, Key resistance, indicates  that fall from 35.60 finished at 26.145 after drawing support from  26.15. So, as long as 28.55, the minor support, holds, I will continue  to favor a rally extension. A break above 30.675 should target 33.74  resistance next. But, a move below 28.55 will dampen this Bullish  POV and turn the focus back to 26.145/150, the support zone.

The Big Picture: Silver's decline from 49.82, the high, is still in  progress and there is no indication of reversal yet. The current development  augurs that price actions from 26.15 is going to develop into a 3 wave  consolidation pattern with rise from 26.145 as the 3rd leg. If that's  the case, I expect Strong resistance around 35.70 to limit upside to  finish the consolidation, and bring another fall towards 24.22, the long  term fibo mark. But, a clear break of 35.70 indicates a bottoming,  with a Double Bottom reversal pattern, and turn focus back to 40, the psych  mark, next.

The Long Term Picture: the Big Q remains, whether 49.82 is a medium term or  long term Top. This current development is starting to favor the latter. Though,  I would prefer to see sustained break of 61.8% retracement of 8.4 to 49.82 at  24.22 to confirm. Stay tuned...

Comex Silver Continuous Contract Monthly Chart

Nymex Crude Oil (CL)

Crude Oil's fall from 103.74 continued last week and broke 98.30, the minor  support.

Initial bias is mildly to the Southside this week for 92.52 cluster  support, 38.2% retracement of 74.95 to 103.74 at 92.74. As long as this cluster  support holds, I expect rebound from 74.59 to continue. A break above  103.74 targets a test on 114.83, the Key resistance. But, a break of 92.52  indicates that rise from 74.95 has likely completed, and deeper decline could  then be seen through a 61.8% fibo retracement at 85.95.

The Big Picture: recent developments indicates that pull  back from 114.83 was completed at 74.95, and medium term rally from 33.2 is not  finished yet. I am tentatively treating rise from 74.95 as resuming of  such rally. A clear break of 114.83 will target 61.8% projection of 33.2 to  114.83 from 74.95 at 125.40.

On the Downside: a break of 92.52, the  Key support, will indicate that correction pattern from 114.83 is going to  extend further with another falling leg to 74.95, and below before  completion.

The Long Term Picture: Crude Oil is in a long term  consolidation pattern from 147.27, with the 1st wave completed at  33.2. The corrective structure of the rise from 33.2 indicates that it is  the 2nd wave of the consolidation pattern. While Crude  Oil could make another high above 114.83, I anticipate Strong  resistance ahead of 147.24 to bring reversal for the 3rd leg of the  consolidation pattern. Stay tuned...

Nymex Crude Oil Continuous Contract Monthly Chart

Paul A. Ebeling, Jnr

Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster's Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.

Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.