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Gold Sinks Before Fed Minutes, Crude Oil May Follow

Ilya Spivak

Gold is under pressure and crude oil may follow amid speculation about an early unwind of Fed stimulus before the bank publishes minutes from January’s FOMC meeting.

Talking Points

  • Gold, Silver Sink as US Dollar Soars Before January’s FOMC Minutes Release
  • Crude Oil and Copper May Fall if Bets on Early Fed Stimulus Exit are Reinforced

Gold and silver are facing heavy selling pressure as the US Dollar soars and anti-fiat asset demand fades before the Federal Reserve releases minutes from January’s FOMC meeting. Traders will be most interested in the tone of discussion surrounding the possible tapering of the size of asset purchases – an approach that has emerged in several Fed officials’ comments over recent weeks – and the possibilities for the timing of such an outcome.

Bond markets suggest investors are pricing in inflation at an average of 2.35 percent over the Fed’s target one- to two-year time horizon, up from 1.47 percent at the beginning of the year. That puts a move above 2.5 percent – the FOMC’s threshold for maintaining the current accommodative posture – well within reach over the coming months. This means Ben Bernanke and company may be pressured to reduce stimulus far earlier than previously expected, supporting a recovery in the greenback.

Cycle-sensitive crude oil and copper prices are trading little-changed, mirroring undecided risk appetite trends reflected in muted early start on US stock exchanges. However, a shift toward the center from the dovish side of the Fed policy expectations spectrum following the FOMC minutes release may spark risk aversion. Needless to say, such an outcome bodes ill for oil and copper prices. Alternatively, affirmation of the central bank’s accommodative posture seems likely to produce the opposite result.

WTI Crude Oil (NY Close): $96.66 // +0.80 // +0.83%

Prices are consolidating above support at 95.14, the 23.6% Fibonacci retracement. Resistance remains in the 98.02-21 area (marked by the 23.6% Fib expansion and the January 30 high). A break higher exposes the 38.2% expansion at 99.91. Alternatively, a reversal below 95.14 initially targets the 38.2% retracement at 93.24.

Commodities_Gold_Sinks_Before_Fed_Minutes_Crude_Oil_May_Follow_body_Picture_3.png, Gold Sinks Before Fed Minutes, Crude Oil May Follow

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Gold (NY Close): $1605.05 // -5.00 // -0.31%

Prices broke below support at 1617.84, the 61.8% Fibonacci expansion, exposing the 76.4% level at 1599.10. A further push below that targets a falling channel bottom at 1586.13. The 1617.84 level has been recast as near-term resistance, with a reversal back above that eyeing the 50% Fib at 1632.97.

Commodities_Gold_Sinks_Before_Fed_Minutes_Crude_Oil_May_Follow_body_Picture_4.png, Gold Sinks Before Fed Minutes, Crude Oil May Follow

Daily Chart - Created Using FXCM Marketscope 2.0

Spot Silver (NY Close): $29.47 // -0.47 // -1.56%

Prices broke support in the 29.62-89 area, marked by the 61.8% Fibonacci retracement and the June 6 high, exposing the 76.4% level at 28.28. A further drop below that aims for the June 28 2012 low at 26.11. Alternatively, a reversal back above 29.89 targets the 50% Fib at 30.71.

Commodities_Gold_Sinks_Before_Fed_Minutes_Crude_Oil_May_Follow_body_Picture_5.png, Gold Sinks Before Fed Minutes, Crude Oil May Follow

Daily Chart - Created Using FXCM Marketscope 2.0

COMEX E-Mini Copper (NY Close): $3.650 // -0.088 // -2.35%

Prices completed a bearish Rising Wedge chart pattern with a break through the formation’s support. Sellers are now testing below the 38.2% Fibonacci retracement at 3.642. A break downward confirmed on a daily closing basis exposes the 50% level at 3.596. Near term support-turned-resistance is in the 3.715-18 area.

Commodities_Gold_Sinks_Before_Fed_Minutes_Crude_Oil_May_Follow_body_Picture_6.png, Gold Sinks Before Fed Minutes, Crude Oil May Follow

Daily Chart - Created Using FXCM Marketscope 2.0

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

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