Gold And Oil Are At Key Inflection Points

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Gold And Oil Are At Key Inflection Points

It’s understandable that most traders who get into speculation tend to focus on currencies. Currencies are the most active market, the most liquid market, the most leveraged market, and the market with the most advertising. That doesn’t mean there are other assets to trade and ones that can make you big returns if you get on the right side of the market.What I’m talking about today are gold and oil. As commodities these assets are affected by the dollar but they also have their own fundamentals and give some pretty good signals.

Gold Is Trading At Resistance, Resistance Is Present

Gold prices shot higher last week as traders around the world moved into the ultimate risk-off trade. The metal tested resistance for two days, Thursday and Friday, and then shot above it today, Monday. At this time the price action is bearish and forming a red candle that confirms the presence of resistance. This makes the $1591 level very important to near and long-term direction as it could become a point of reversal or continuation. In either case the moves will be big over the next few weeks and months.

What might push gold higher? The spreading coronavirus, its impact on the global economy, and a growing chance the S&P 500 might fall 20% or more. The FOMC outlook helps too. The Fed is expected to cut rates in the middle of the year and that will definitely hurt the dollar and help gold. If gold breaks above resistance and closes there we can expect it to continue rising in the near to short-term. My initial targets are at $1700 and $1725.

What might keep gold from moving higher? The technical. The technical are incredibly bearish and point to a major reversal in prices… if there is a catalyst to sell. What I am noting is a significant divergence in MACD from the current high, if that signals confirms in the stochastic and/or with price action a move to $1560 is certain, a deeper decline will depend on price action at the moving average.

Oil Trading At Support

Oil prices have been in a steep decline over the past month or so as tepid demand, rising supply and now the coronavirus weigh on prices. The black gold, WTI I am talking about here, is now trading at an 8-month low and may move much lower. The question is what will happen this week at the surprise OPEC meeting. The cartel is sure to talk about prices and the possibility of another production cut, the risk to the market is if they decide to cut or not and by how much if they do. If WTI breaks to a new low expect it to fall another 10% to the $45 region, if support confirms prices could rebound 10% t0 20% over the next week or so.

Gold and Yen at Key Inflection Points; Watch for Possible Breakdown

Background: Moves in the Japanese yen have been a reliable indicator for gold due to the effects of the yen carry trade. Given ultra-low interest rates in Japan, its currency has been the funding currency for global speculators who borrow in cheap yen and then speculate in other assets. When the yen weakens, there is greater borrowing of the currency to chase financial assets all over the globe. This pushes financial assets higher and reduces overall market volatility, which decreases the allure for gold as a safe haven asset. A weak yen relative to a stronger dollar is also negative for gold since a stronger dollar is typically associated with lower overall inflation rates. Thus, when the Bank of Japan (BOJ) decided to embark on a massive money printing program in 2020 to end deflation in Japan, that effectively marked the end for the bull run in gold.

In this chart and those that follow, I show the yen inverted (in red) next to gold (in black) to illustrate the relationship over the key timeframes discussed. Here is the price of yen and gold from 2007-2020:

With the increase in financial stress in global financial markets caused by the selloff in oil from 2020, coupled with the Chinese currency devaluation in the middle of 2020 and early 2020, financial risk globally picked up and, with it, came the bottom in the yen currency and gold. The yen bottomed first in the summer of 2020 when China surprised the world with devaluing its currency, and then gold bottomed later that year.

The 2020 bottoms in both gold and the yen were followed by strong rallies into 2020 before finally topping out in the second half of the year. As you can see, the two have moved in a nearly lockstep manner.

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Given the strong yen-gold relationship, gold investors should take into consideration that the bear market rally in the yen from 2020 until now may be over, which would lower the outlook for gold. The likely catalyst for a decline is continued monetary tightening in the U.S. and continued easing by the Bank of Japan. Of the world’s three major central banks—the BOJ, the European Central Bank (ECB), and the U.S. Fed—the Bank of Japan is likely to stay accommodative the longest.

Here is a chart from BlackRock showing the estimated path of central bank asset purchases from the three major central banks into 2020. According to their projections, only the BOJ will continue its asset purchase program while the ECB “tapers” and the Fed moves to outright shrinkage of its balance sheet this month.

Hindsight is always 20/20 and looking back it was clear that 2020 was a significant pivot point in the yen (as well as gold) when a multi-year bullish uptrend moderated and then finally broke:

Now, as above, it appears we are approaching yet another major inflection point. The yen peaked in 2020 and bottomed in 2020 and has been coiling ever since, which is leading to two conflicting trends: a long-term downtrend and a short-term rising uptrend since 2020. These trends are converging and we are likely to experience a resolution in the coming months either of another leg down in the yen and gold after a respite from 2020 (the more likely scenario indicated by current monetary policy projections), or the more desired scenario of gold investors across the globe—that is, 2020 marked the bottom of a cyclical downturn from the 2020 highs and gold is now in the beginning stages of commencing its long-term (secular) bull market, which started in the early 2000s.

If the strong (and much overlooked) relationship between gold and the yen continues, this will be a key chart to watch for which outcome ends up playing out:

I’ll be presenting more of my thoughts and outlook on the global investment landscape October 21st in Del Mar, San Diego. For any of you that would like to attend, click here for more details. As I’ve mentioned in prior articles and podcasts, I do believe we are nearing the end of this bull market and will present a very useful framework for tracking the business cycle, understanding current risks, and how this all relates to our investments.

Gold, Crude Oil Price Gains Fail to Breach Key Chart Barriers

GOLD & CRUDE OIL TALKING POINTS:

  • Gold prices correct higher as the US Dollar retraces gains
  • Crude oil prices manage meager bounce following plunge
  • Thin market liquidity might amplify any kneejerk volatility

Commodity prices were in corrective mode yesterday after the prior session’s fireworks . Gold prices edged higher as the US Dollar retraced some of Tuesday’s gains while a cautious improvement in risk appetite helped buoy sentiment-sensitive crude oil prices. They rose alongside the bellwether S&P 500 index, seemingly ignoring EIA inventory data showing an unexpectedly large 4.85 million barrel build last week.

Looking ahead, the closure of US financial markets for the Thanksgiving holiday is likely to drain liquidity and dampen price action. Thin trading conditions might amplify kneejerk volatility in the event that a particularly potent bit of news hits the newswires unexpectedly. Market participants would be wise to question scope for follow-through on any such moves before participation levels rebuild.

Learn what other traders’ gold buy/sell decisions say about the price trend !

GOLD TECHNICAL ANALYSIS

Gold prices are testing a downward-sloping resistance line at 1227.09, with a daily close above that opening the door for a test of the 1235.24-41.64 area. Alternatively, a move below the chart inflection area in the 12.11.05-14.30 zone exposes counter-trend support at 1200.42. A breach of this level may mark resumption of the longer-term decline started in mid-April.

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices retested but conspicuously failed to close above support-turned-resistance in the 54.48-55.21 area. From here, a turn lower that breaches below the 52.34-83 zone paves the way to challenge the October 2020 low at 49.16. Alternatively, a daily close above 55.21 targets the February 9 low at 58.11.

COMMODITY TRADING RESOURCES

  • See our guide to learn about the long-term forces driving crude oil prices
  • Having trouble with your strategy? Here’s the #1 mistake that traders make
  • Join a Trading Q&A webinar to answer your commodity market questions

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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