The Overall Fundamentals

The volatility meter was high last week as commodities appeared to have stabilized modestly. After extending the previous week's sell off last Monday, most commodities rebounded sharply on hopes that European leaders were about to deliver crucial measures to contain the sovereign debt crisis.

On the macro-front, only 2nd-tier data were released and many of them surprised to the Northside. This also helped maintain the rebound in the near-term.

The focus of the week was in the EuroZone. The annual World Bank-IMF meeting managed to push European finance ministers to work 'harder' in devising policies to restore confidence EuroZone's financial system.

While leaders were divided in what means to use, the split was not as big as we anticipated and broadcast in the media.

Example: the lower house of the German parliament passed the new EFSF bill with a big margin. It is likely that all of the 17 EuroZone member nations will approve the plan a agreed in July.

There will be several central banks meetings; RBA, BOJ, ECB and BOE, in the coming week.

Interesting, 2 banks, namely the RBA and the ECB, which has raised interest rates over the past 12 months are currently facing increasing speculations of rate cuts in the upcoming meetings.

I believe the RBA will wait and see, and leave the cash rate unchanged at 4.75%. But, a rate cut may be seen in November or December.

The ECB will probably announce some easing measures although it is not necessarily a rate cut. There have been hopes of re-launch of the covered bond purchase program and reintroduction of the 12-month loans for the region's banks.

Gold and Silver +

Gold recorded losses for a 4th consecutive week driven by CME's margin hike, strength in the USD. and liquidation of Long positions to cover losses in risky assets.

The benchmark Comex contract fell below 1550 for the 1st time since July last Monday. Gold's outlook in the near-term is cloudy.

Hopes on QE-3 have lessened since the last FOMC meeting and investments for safe-haven bonds increased at the expense of Gold and Silver.

Silver is experiencing greater volatility than Gold, as gold has corrected around 15% from the record higher of 1923.7 made 4 weeks ago, Silver's decline over the period was almost 30%.

After falling to a bottom of 31-32 in late April, the Gold/Silver ratio has been rising and the recent sell off has sent the ratio back above 50, a level not seen since November 2010.

As we mentioned in my prior reports, slowdown in advanced economies is more detrimental to precious metals with heavy industrial application e.g.: silver and PGMs, than Gold. The chart below shows that US ISM index below 50 is often accompanied with a rising Gold-Silver price ratio.

The Gold survey released in mid-September, GFMS forecast Gold price will rise above 2000 before the end of the year.

According to the consultancy, a confluence of problems: 'deterioration in prospects for the World economy over August, the maintenance of low interest rates, fears over the emergency of inflation in the industrialized World, a continuation of high levels of inflation in many emerging markets and the outbreak of conflict in MENA' created the 'perfect storm' for Gold investments.

This aligns with my POV that the recently correction in Gold will be supported at some points, possibly 1500 Zone, and the long-term rally will resume as long as Global economic uncertainty persists and/or intensifies and World central bankers leave interest rates low for an extended period.

Crude Oil


Though still wide, the spread between WTI and Brent Crude Oil narrowed a bit as fears of sovereign crisis in the EuroZone, and return of Libyan output damped prices of the latter.

Italian Oil company Eni said last Monday it has resumed Crude Oil production in the Country, producing some 31.9K BPD.

French company Total also said it had restarted some production last week.

News reports indicated that the Al-Jurf field could produce up to 40K BPD in coming weeks. But, I am not too worried that resumption of Libyan Crude production will result in oversupply.

The above mentioned Crude Oil output should be benchmarked off Urals, instead of light, sweet Crude benchmarked to Brent. It will take time for a normalization of the Libya's Crude Oil market.

Key factors keeping Crude Oil on the defensive are concerns over Global economic slowdown and heightened European debt crisis, as well as weakness in US stock markets and strength in the USD. These conditions will remain intact in coming months and should continue weighing on the price of Crude Oil IMO.

The Overall Technicals

Comex Gold (GC)

Gold continued to engage in sideway consolidation last week and such consolidation might continue first.

On the Upside: My work says that the break of 1705.4,a Double Top neckline is needed to indicate a near term trend reversal. Otherwise, the fall from 1923.7 is still expected to continue. A break below 1535 will target 1500, the psych mark next. But, a break of 1705.4 will augur that fall from 1923.7 may be over and will bring on a Stronger move towards the high.

The Big Picture: the action in here indicates that Gold has made a medium term top at 1923.7, ahead of long term projection level of 161.8% projection of 253 to 1033.9 from 681 at 1945.6 and 2000, the psych mark. While the fall from 1923.7 is deep, Gold is holding inside its long term rising channel from 681 and above 55 weeks EMA at 1504.1. So, I am not too Bearish on Gold yet. Strong support is seen at 1478.3/1577.4 support Zone and should contained any downside initially, and bring on a rebound. But, note that sustained break of 1478.3 will Strongly suggest that the long term up-trend has reversed.

The Long Term Picture: Gold faced strong resistance ahead of 161.8% projection of 253 to 1033.9 from 681 at 1945.6 and fell sharply, but there is no change in the long term up-trend yet IMO, as long as 1478.3 support holds. So, I will stay Bullish, and expect an eventual break of 2000 psych mark in the long run.

Note: a break of 1478.3 will be an important signal that whole up-trend from 1999 low of 253 is finished. And, in that case, Gold could drop through 1033.9 resistance turned support. Stay tuned...

Comex Silver (SI)

Silver stayed in a converging range last week engaged in sideway trading. Initial bias remains Neutral this week and more consolidation could be seen.

Strong support was seen at 26.30, the Key support mark, but there is no follow through buying so far. Outlook is mixed and I will stay Neutral in here.

On the Upside: a break above 33.58, Key resistance, suggests that whole fall from 44.275 is possibly over, after hitting 26.30, the Key support. If that is the case, a Stronger rise should be seen towards 38.76/44.275 resistance Zone. But, a clear break of 26.15 will have a Bearish implication, and should drive Silver towards 20, the psych mark.

The Big Picture: right here and now , I see the price actions from 49.82 as correction to the up-trend from the Y 2008 low of 8.4. So, Strong support should be seen inside 26.30/31.275 support Zone, considering that 100% projection level of 26.75 is also right there. Should Silver stabilize there and rebound, there is the prospect of another rally to 50, the psych mark. But, a decisive break of 26.30 will cloud this and augur that Silver is correcting the whole up-trend from the Y 2001 low of 4.01. If this is the case, a deeper decline would be seen through 21.44, the resistance turned support.

The Long Term Picture: the sell off from 49.82 raises the possibility that long term up-trend from 4.01 is nearing completion as it faced strong resistance from 261.8% projection of 4.01 to 21.44 from 8.4 at 54.032. But it is to early to confirm long term reversal in here. Nevertheless an important Top should be near, if not at made at 49.82. Upon confirmation of the reversal, Silver will likely dive towards 55 months EMA at 21.80 and lower. Stay tuned...

Nymex Crude Oil (CL)

Crude Oil's recovery was limited to 84.77 last week and failed to sustain the move above 4 hrs 55 EMA after several attempts.

Last Friday's sharp decline suggests that the recovery may be finished, and decline may be resuming. The initial bias is mildly on the Southside this week for a move to 77.11 1st. A clear break there will likely send Crude Oil through the 75.71 support to 70, the psych mark.

On the Upside: a break above 84.77 will delay the Bearish POV, and bring more consolidating trading. But, I expect upside to be limited to below 90.52, and bring on Southside break out soon.

The Big Picture: medium term rebound from 33.2 is treated as the 2nd leg of the consolidation pattern from 147.24 and should have finished at 114.83. This decline should target the next Key cluster support Zone at 64.23; 61.8% retracement of 33.2 to 114.83 at 64.38 next. A clear break there will show the way to retest the 33.2 low.

On the Upside: a clear break of 90.52, the Key resistance, is needed to invalidate this POV, and baring that I am Bearish in Crude Oil now.

The Long Term Picture: Crude Oil is in a long term consolidation pattern from 147.27, with 1st wave completed at 33.2, the 2nd wave might be finished. Upon confirmation of the medium term reversal, the 3rd wave of the pattern should have started for a retest on 33.2, the low. Stay tuned...


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.