Precious Metals Outlook Turns Clouded

Spot Gold (NY Close): $1526.63 // +9.60 // +0.63%

Gold prices have taken out resistance at $1519.55, the 50% Fibonacci retracement of the drop from the May 2 high. From here, the bulls aim to challenge resistance at the 5/11 high ($1526.60), a barrier reinforced by the 61.8% Fib at $1533.12. Broadly speaking, anything shy of a daily close above the latter threshold keeps the overall structure of the ascending triangle carved out over the past three weeks intact, pointing to bearish continuation. If a bullish breakout does materialize however, the 76.4% Fib at $1549.91 will stand as the last barrier before a run at the 5/2 swing high at $1577.05.

The metal's correlation with the S&P 500 remains its best-defined cross-market relationship, hinting the recovery in S&P 500 stock index futures in European trade is telegraphing a move higher. With that in mind, the strength of the correlation has weakened a bit after yesterday's divergence between shares and the yellow metal. We suspect this seemingly odd performance was linked to the type of risk aversion that brought down stock markets: when the selloff follows a QE2 theme, as had been the case until the beginning of this week, gold trades along-side risky assets; when selling pressure was recast in the context of the euro zone debt crisis, the metal shifted (if only temporarily) to its more traditional safe-haven role. Broadly speaking, gold's link to the risky asset bloc seems likely to return as a broad-based unwinding of QE2-linked positioning commences, but the landscape appears somewhat clouded over the near term.

Spot Silver (NY Close): $36.67 // +1.60 // +4.55%

Prices took out resistance at $36.44, the 23.6% Fibonacci retracement of the 4/25-5/6 decline, opening the door for an advance to challenge the 38.2% level at $38.99. The 23.6% barrier has been recast as near-term support.

As with gold, the correlation between silver and the S&P 500 remains significant but has retreated bit from the highs noted earlier in the week. Still, the metal appears to be far more responsive than its more expensive counterpart to the European-session reversal in risk appetite, with prices heading higher as stock index futures pare losses while gold trades flat.

With that in mind, it remains to be seen however if the advance has more to do with overall risk trends or the fading flare-up in euro zone sovereign risk. Indeed, if the latter is the case, the overnight drop in Greek CDS rates may keep silver supported in spite of whatever risk-averse cues emerge from a soft US durable goods result.

WTI Crude Oil (NY Close): $99.59 // +1.89 // +1.93%

Prices continue to consolidate below the 50% Fibonacci retracement of the drop from the May 2 high at $104.73, with anything shy of a daily close above this boundary keeping the overall structure bearish. A descending triangle formation above $94.65 bolsters the case for downward continuation, with a daily close below the pattern's lower boundary initially exposing $91.90.

Risk sentiment trends remain in focus with the WTI contact still intimately correlated with the S&P 500 on short-term studies. Futures tracking the benchmark index are rapidly reversing their Asia-session drop in European hours and taking crude prices along for the ride. A sharp drop in Greek CDS rates seems to be the catalyst behind the surge in risk appetite, pointing to waning fears about an imminent default in the debt-laden country. The burst of optimism came as international debt inspectors returned to Athens to continue reviewing Greece's progress toward meeting the terms of its initial 110 billion euro EU/IMF bailout package, deciding if the next 12 billion euro round of loans will be distributed in June.

Looking ahead, the US economic calendar will capture the spotlight. Official DOE inventory figures headline the docket after yesterday's preliminary API figures showed crude stockpiles dropped for the first time in seven weeks, fueling an advance. Today's version of the report is set expected to show inventories declined by a whopping 1.5 million barrels last week, the most in a month, promising to underpin the increasingly supportive risk sentiment landscape. Upside momentum may be curtailed by April's durable goods orders reading however, with expectations calling for the largest drop in six months (-2.5%).

Ilya Spivak is New York-based currency strategist for DailyFX.

About the Author
Ilya Spivak

Ilya Spivak is San Franciisco-based currency strategist for DailyFX.

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