Oil Rebounds, Gold Edges Higher

Oil also recovers on stimulus hopes

Oil prices recovered overnight, boosted by OPEC+’s JMMC holding its nerve on production cuts, and rising expectations that a US stimulus deal will occur. The sentiment was boosted by Nancy Pelosi’s pre-election deadline passing, but communications with Steve Mnuchin were continuing. That also explains the outperformance of WTI versus Brent crude over the past two sessions.

Brent crude rose 0.75% to USD42.75 a barrel overnight, climbing another 0.20% to USD42.90 in Asia today. WTI continues to price in a US stimulus deal, delivering a considerable boost to domestic consumption. WTI jumped 1.05% to USD41.10 a barrel overnight and continued rallying in Asia, climbing another 0.35% to USD41.45 a barrel.

Brent crude has resistance at USD43.50 and then USD44.00 a barrel, with support at its 200-day moving average (DMA) at USD41.50 a barrel. WTI meanwhile, is testing six-week resistance at these levels, and a daily close above USD42.00 a barrel theoretically opens further gains to USD43.50 a barrel. Support appears at its 50-DMA at USD40.55 a barrel, and its 100-DMA at USD40.30 a barrel.

With the market so determined to price in a positive outcome to the US stimulus package, including the Republican-dominated Senate voting for it, further gains are possible. Momentum is momentum, and I shall not stand in front of it. With so much good news being priced into financial markets to the total exclusion of the risks to the process, the potential correction from disappointments could be formidable indeed. WTI, with so much good news priced in, is acutely vulnerable to a massive downward correction in that scenario.

Gold tests resistance as US dollar falls

Gold ignored a steepening US yield curve overnight, focusing entirely on a weaker US dollar as it rose 0.15% to USD1907.00 an ounce overnight. With US equity futures rallying in Asia and the US dollar falling again this morning, gold’s rally has accelerated. Gold has risen to 0.65% to USD1919.00 an ounce, challenging the triangle resistance that could signal a substantial rally higher.

Gold’s range has been compressing over the past month, signalling a breakout is coming. The top of the triangle today is at USD1918.25 an ounce, which gold has moved through this morning. I would prefer to see a daily close above the 50-DMA at USD1925.00 an ounce to confirm the breakout though. The technicals suggest gold could potentially rally another USD100 an ounce, taking it back through USD2000.00 an ounce. Support today lies at USD1907.00 and USD1895.00 an ounce, the base of the triangle.

Although I was expecting gold to outperform into the US election anyway, as investors hedged risk, the technical picture suggests that time is arriving sooner, albeit with the 50-DMA caveat and my shocking record of picking tops and bottoms. If the US dollar continues on the back-foot, there is no reason why the rally cannot continue as expected. Should stimulus negotiations reach an impasse, the ensuing sell-off in equity markets will test gold’s resolve. Recent selloffs by equity markets have also seen gold prices crushed as well. We have yet to see evidence that gold can stand on its own two feet as a haven asset in that scenario in recent times.