Crude Oil Grinds Higher On Outlook, Gold Edges Lower After 30% Gain In 2010

Commodities – Energy

Crude Oil Grinds Higher on Outlook

Crude Oil (WTI) – $91.71 // $0.33 // 0.36%

Commentary: Crude oil is kicking off the new year on a positive note, with WTI rising close to $92 and Brent surpassing $95 in overnight trade. Loose monetary conditions and a strong economic outlook remain the two bullish underpinnings of crude. Prices will likely gravitate higher as long as news flow stays positive. We would wait for the inevitable correction, however, before initiating fresh long positions. An excerpt from our latest special report:

"All things considered, benchmark crudes have accounted for quite a bit of bullishness with prices sitting in the mid-$90's. There will likely need to be evidence that the market has tightened more-than-expected before a move into the triple digits. As stated [previously], the bullish wildcard is demand growth from developed economies, while the bearish wildcard is non-OPEC supply. Additional variables to consider include China's demand growth as the country's central bank tightens monetary policy and OPEC crude supply as Iraq lifts production and quota compliance falls due to higher prices."

Technical Outlook: Prices are range-bound between $91.88 – the recent swing high – and the 23.6% Fibonacci retracement at 11/17-12/27 rally at $89.09. A break higher exposes the top of a rising channel set from August at $93.22 while a reversal lower exposes the 38.2% Fib at $87.36.

Commodities – Metals

Gold Edges Lower After 30% Gain in 2010

Gold – $1416.95 // $3.83 // 0.27%

Commentary: The numbers are officially in—gold rose 29.5% in 2010, its tenth straight annual gain. Prices closed out the year just shy of the record nominal high of $1431.25. The fact that the U.S. Dollar fell for seven straight sessions to close out the year helped give a final boost to gold.

Can the bull market continue in 2011? All the ingredients are still there for gold to continue its rally—investor interest remains high, with demand from China, in particular, surging. Furthermore, this interest has been consistent, as flows into gold ETFs have risen steadily since these financial products were introduced almost seven years ago.

2011 will be interesting, however, as it may be a transition year. By the end of 2011 we may actually see the major central banks begin to tighten monetary policy. As rates in the U.S., for example have been flat since the end of 2008, this will be a dramatic shift that could spur profit-taking in gold.

Technical Outlook: Prices have taken out resistance at $1414.34, the 14.6% Fibonacci retracement of the 10/22-12/7 rally, with the bulls now poised to challenge the record high at $1431.25. The 14.6% level has been recast as near-term support.

Silver – $30.82 // $0.10 // 0.33%

Commentary: Silver advanced an incredible 83% in 2010, as investor interest shifted meaningfully in favor of the cheaper precious metal. At one point in 2010, the gold/silver ratio hit a high of almost 71, but by the end of the year the ratio plunged to 45, the lowest since early 2006. The culprit was aggressive investment flows into the metal, especially via financial products such as ETFs. Silver ETF holdings rose by almost 100 million troy ounces to 485 million over the course of the year. That is significant in a market that is roughly 900 million troy ounces in size.

The gold/silver currently stands at 46, near the lowest levels since April 2006. (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 set a new 30-year high last week but positioning hints a reversal lower is ahead. Prices have carved out a bearish Rising Wedge formation since early November, a setup reinforced by clear-cut negative divergence on RSI studies. Confirmation of a downward breakout requires a daily close below the wedge bottom, now at $29.39. More immediate support lines up at $30.17.