Bullion Vulnerable if Traders Trim Fed Bets

Spot Gold (NY Close): 1819.63 // -13.98 // -0.76%

Gold continues to show a strong inverse relationship with the S&P 500, hinting at losses ahead as futures tracking the benchmark equity index rise ahead of the opening bell on Wall Street. Improving US economic data ought to reinforce selling pressure, with diminishing hopes for another round of quantitative easing from the Federal Reserve weighing against the yellow metal's allure as an alternative store of value and inflation hedge.

As with oil, the technical landscape is broadly unchanged from what we identified yesterday: "A pair of Bearish Engulfing candlesticks may be marking a double top below the $1,900 figure, with confirmation seen on a break of an upward-sloping neckline established since early August. Negative RSI divergence bolsters the case for a downside scenario." A break lower from here aims at a measured target near $1,636.87, though a confirmed close below trend line support is needed to calculate an implied target more precisely.

Spot Silver (NY Close): $40.70 // -0.29 // -0.71%

Like its more expensive counterpart, silver continues to show a significant inverse correlation with the S&P 500 and so finds itself under pressure amid the upswing in risk appetite in European hours. The improvement in US economic data expected to cross the wires as North America comes online poises to reinforce this trajectory.

As we pointed out yesterday, the technical layout sees "a Head and Shoulders top developing below the $44.00 figure. A break through rising trend line support set from late July (which doubles as the Head and Shoulders setups' neckline) exposes a measured target of $33.28."

WTI Crude Oil (NY Close): $88.91 // -1.30 // -1.44%

Crude prices diverged from larger trends in risk appetite yesterday, moving lower even as stocks pushed higher as gasoline inventories swelled by the most in 14 weeks. Looking ahead however, the correlation between the WTI contract and the S&P 500 contract remains robust and the absence of energy sector-specific data on the calendar points to the return of sentiment as the core driver of price action.

This puts the onus on the US Consumer Price Index report, where expectations suggest the core inflation rate (excluding food and energy prices) will accelerate to 1.9% in August to mark the highest reading in 28 months. Meanwhile, the Empire manufacturing growth metric as well as the Philadelphia Fed gauge of business confidence are both expected to show improvement in September.

The outcomes would fit with the improvement in leading US growth indicators since early June (as tracked by a Citibank index of US data surprises). While this process has surely proven slow and uneven, as evidenced by yesterday's disappointing Retail Sales reading, the cautious improvement in the growth landscape that it implies promises to underpin risk appetite and drive crude higher along with share prices. Indeed, S&P 500 index futures are ticking firmly higher heading into the opening bell in New York. With that said, a counter-intuitive interpretation whereby stronger data is seen as a risk-negative in that it diminishes the chance for further Fed stimulus appears to be a distinct possibility.

Technical positioning is largely unchanged from yesterday: "Positioning closely mirrors that of the S&P 500, with prices testing the top of a Flag chart formation reinforced by the upper boundary of a rising channel set from early May. Here too, the setup is hinting at bearish continuation pattern, with initial support lining up at the 23.6% Fibonacci extension level ($83.12)." The formation of a Bearish Engulfing candlestick pattern reinforces the case for a downside scenario.

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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