Gold prices jumped to their highest in three months yesterday on the back of a widely-circulated Financial Times article that claimed the Federal Reserve will extend the so-called “Operation Twist” stimulus program beyond June. The scheme has the Fed selling shorter-term assets on its balance sheet in exchange for further-dated ones to target a decline in the long-term borrowing costs. Bloomberg News also cited sources saying buying by automated trading systems buoyed prices.
Looking ahead, strong correlations between precious metal prices US inflation expectations (measured by “breakeven rates”, the spread between nominal and inflation-linked Treasury bond yields) puts the spotlight on US jobless claims and House Price Index figures due today. An overnight pullback in the US dollar may also emerge as a supportive factor, although a sudden downward reversal in S&P 500 stock index futures in early European trade may reboot safe-haven demand for the greenback to the detriment of both gold and silver. The selloff appears to have followed an EU Commission report forecasting the regional bloc’s collective economy will shrink 0.3% in 2012 (compared with previous estimates of a 0.5% expansion).
The emerging adverse reversal in risk appetite trends likewise bodes ill for copper prices. The metal remains highly sensitive to global economic growth expectations, meaning the return of slowdown fears is likely to be a considerable headwind. Selling pressure may be at least partially offset near-term however amid reports that production lagged demand by the largest margin (119,000 metric tons) in November, according to ICSG.
Tensions with Iran continue to inject a considerable geopolitical risk premium into crude oil prices, with the WTI contract touching an eight-month high yesterday. The latest bit of escalation came after talks between Tehran and IAEA came apart after the government refused to allow inspection of a site in Pachin reported to be testing explosives.
Technical positioning warns a pullback may be ahead however (see below), hinting the recent batch of supportive news-flow has been priced in already. Still, with Iran reportedly starting to conduct civilian defense drills in preparation for armed conflict, the satiation is unlikely to be defused quickly (if at all) so the path of least resistance continues to broadly favor the upside.
Prices continued higher after putting in a Bullish Engulfing candlestick pattern above support $1,714.60, breaking resistance at $1,763.00. The bulls now aim to challenge the November 8 high at $1,802.80, although early signs of negative RSI divergence hint upward momentum may not prove long-lasting. The $1,763.00 level has been recast as near-term support.
Spot Silver (NY Close): $34.27 // -0.04 // -0.12%
Prices are testing above range resistance at $34.37, the Feb. 2 swing high, with an upward breakout exposing the $35.30-$66 area. For now, support remains at $32.60, the $23.6% Fibonacci retracement level, though a confirmed upward piercing of $34.37 on a daily closing basis would recast that level as the immediate downside barrier.
COMEX E-Mini Copper (NY Close): $3.834 // -0.002 // -0.05%
Prices have paused after taking out resistance at $3.789 (now acting as near-term support). Renewed upward momentum initially targets $3.909. Alternatively, a break back below $3.789 sees rising trend line support at $3.720.
WTI Crude Oil (NY Close): $106.28 // +0.44 // +0.42%
A candle in Star position below resistance at $106.81, the $138.2% Fibonacci extension, gives early warning that a pullback may be ahead. Initial support lines up at $105.61, the 123.6% Fib. A break lower exposes the January 4 swing high at $103.66.
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Ilya Spivak is New York-based currency strategist for DailyFX.