The fundamental landscape remains broadly supportive for commodity prices into the end of the trading week. On the economic data front, US releases are expected to show new home sales hit a nine-month high at 315K in January while a revision of February’s University of Michigan consumer confidence gauge sees sentiment upgraded from the preliminary reading reported two weeks ago. Needless to say, signs of firming recovery in the world’s largest economy are directly beneficial for cycle-sensitive copper prices.
Supportive US data likewise offers a boost to gold and silver prices. On one hand, a pickup in growth against a backdrop of ultra-loose monetary policy stokes medium-term inflation expectations, boosting store-of-value demand for precious metals. Indeed, investors’ priced-in outlook for prices over the coming two to five years (reflected in “breakeven” rates, the spread between nominal and inflation-adjusted Treasury bond yields) is hovering at the highest levels since May. On the other hand, a pick-up in risk appetite weighs on the safe-haven US dollar, offering both metals a de-facto lift.
As for crude oil, while a risk-on environment is generally supportive, geopolitical considerations remain of primary near-term significance. The WTI contact has benefitted from a swelling geopolitical risk premium as Iran-linked supply disruption jitters multiply, riding them to a nine-month high yesterday. In the absence of fresh news-flow, traders may look to book profits on long positions, opting not to expose themselves to weekend risk given the inherent instability of the situation. This could force a short-term pullback.
Importantly, the probability that such an outcome will turn into a meaningful reversal appears relatively small. Recent news-flow suggests China, Japan and India – the top three buyers of Iranian crude – will substantially reduce imports amid Western pressure. Feeling increasingly isolated, Tehran might be encouraged to lash out, raising fears of an imminent conflagration that may compromise the critical Strait of Hormuz shipping lane that carries close to 40% of global seaborne crude supply. On balance, this suggests the situation is far cooling, with any near-term term weakness likely to prove corrective.
WTI Crude Oil (NY Close): $107.83 // +1.55 // +1.42%
Prices cleared 50% Fibonacci extension resistance at $106.70, with the bulls now aiming to challenge the 61.8% barrier at $110.04. The $106.70 level has been recast as near-term support. Notably, RSI studies are at their most overbought since April (the last time Iran-linked jitters inflated crude prices). That was followed by a sharp decline in May, so the threat of a reversal may be rising.
Spot Gold (NY Close): $1,780.68 // +4.45 // +0.25%
The break above the Dec. 2 high at $1,763.00 exposes the $1,800.00 figure as the next important barrier. Early signs of negative RSI divergence warn of lackluster bullish momentum however, warning a pullback may be ahead. The $1,763.00 level has been recast as near-term support.
Spot Silver (NY Close): $35.34 // +1.07 // +3.12%
Prices took out resistance at $34.37, the February 2 swing high, with the bulls now testing the October 28 top at $35.66. A break above this barrier will open the door for a challenge of the Aug. 9 low at 36.99. The $34.37 level has been recast as near-term support.
COMEX E-Mini Copper (NY Close): $3.806 // -0.028 // -0.73%
Prices continue to stall having taken out resistance at $3.789, a level now recast as near-term support. Renewed upward momentum initially targets $3.909. Alternatively, a break back below $3.789 sees rising trend line support now at $3.730.
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Ilya Spivak is New York-based currency strategist for DailyFX.
