Crude Oil Drops Slightly On China Rate Hike, Gold Digests A 10th Year Of Gains

Commodities – Energy

Crude Oil Drops Slightly on China Rate Hike

Crude Oil (WTI) – $9.38 // $0.13 // 0.14%

Commentary: Crude oil is kicking off the new week to the downside after the People's Bank of China raised rates by 25 basis points over the weekend. Prices are well off the lows, however, as traders use the opportunity to buy. Readers may recall that last week crude oil broke out to a 27-month high after rising for five sessions in a row. Can the streak be kept alive this week? While there is no doubt the fundamentals are extremely supportive of the commodity at the moment—inventories are drawing down rapidly and global economic growth is continuing robustly—a correction at some point is to be expected given how fast oil has climbed. All that is necessary is a catalyst to spur traders to lock in profits. Though a single 25 basis point hike from the PBoC does not materially change the outlook for China and by extension oil, it may be enough to send prices lower temporarily. Overall, expect volume to be extremely light as we approach the end of 2010.

Technical Outlook: Prices have paused after taking out resistance at $91.17, the December swing high. Still, positioning suggests the door is open for an advance to test the upper boundary of a rising channel set from August (now at $92.26). The $91.17 level has been recast as near-term support.

Commodities – Metals

Gold Digests a 10th Year of Gains

Gold – $1383.90 // $2.43 // 0.18%

Commentary: Last week gold was little changed as capital flowed into other economically-sensitive risk assets. Prices are again doing little as traders await the next catalyst. Overall, 2010 was another solid year for gold, as the metal rose 26% (year-to-date), after rising 26% in 2009 and 5% in 2008. Prices have not put in a negative annual return since the year 2000. Obviously, this streak will end at some point. But the circumstances that have fueled this performance—ever-increasing investment inflows, central banks becoming net buyers, and now surging demand from China—have not gone away. Eventually, prices will reach a point where circumstances change, where supply and demand reach a more sustainable equilibrium—but there is no evidence of that happening yet.

Technical Outlook: Prices remain locked between $1392.46 and $1380.47, the 32.8% and 50% Fibonacci retracements of the 11/16-12/7 rally, respectively. A break lower exposes the 61.8% Fib at $1368.49, while a push through near-term resistance clears the way for a retest of a rising trend line set from mid-November, now at $1405.37.

Silver – $29.21 // $0.08 // 0.29%

Commentary: Silver continues to be well-behaved as the metal consolidates in step with gold.

The gold/silver ratio rose slightly to 47.4, near the lowest levels since February 2007. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance).

Technical Outlook: Prices continue to consolidate between the 14.6%and 23.6% Fibonacci retracements of the 10/22-12/07 rallyat $29.55 and $28.85, respectively. A break above near term resistance exposes the latest swing high at $30.70. Alternatively, a push lower targets the 38.2% Fib at $27.70.