Crude Oil, Gold Decline as Traders Begin to Position for the Expiry of QE2

Crude oil, gold and silver prices pushed lower as traders seemingly began to reposition for a world without QE2, weighing on inflation bets and sapping risk appetite.

Commodities – Energy

Crude Oil Follows S&P 500 Lower

WTI Crude Oil (NY Close): $111.05 // -2.47 // -2.18%

Prices took out support at the bottom of a rising channel set from mid-March, finding interim support just above the $110 figure (the April 15 high). A corrective bounce from here sees resistance at $113.65, while continued selling aims to challenge $105.53.

Oil prices fell despite an API report showing crude inventories declined last week, with the WTI contract following shares lower as the S&P 500 fell for a second day amid what was chalked up to profit-taking. We expected the risk rally to continue as traders rush to borrow Dollars on the cheap to purchase higher-yielding assets ahead of June’s expiry of QE2 (as confirmed by the Fed last week), but it is feasible to suspect that the markets are already looking ahead to higher yields in the second half of the year and paring exposure accordingly. Typically, the initial drop will be met with investors still holding out hope for further gains who will step in to prop up prices initially on the belief they are getting a comparatively cheaper entry into the uptrend, engineering a bounce. If yields rise in earnest as we suspect however – a likely outcome given the US’ precarious fiscal position in and of itself – this move higher should prove corrective and sellers will push prices meaningfully lower through the end of the year.

Looking ahead, official DOE inventory figures and the US ISM Non-manufacturing Composite gauge headline the calendar; with expectations calling for conflicting cues as the former reflects a drawdown while the latter points to accelerating service-sector growth. If broad-based profit-taking on risky asset bets gains momentum however, these figures will not amount to much and the selloff will continue.

Commodities – Metals

Gold, Silver to Decline as Inflation Expectations Ease

Spot Gold (NY Close): $1535.97 // -9.38 // -0.61%

As we discussed yesterday, the weekly gold chart sees prices testing the top of a rising channel that has confined trading for the past year. Zooming in closer to daily bars, a bearish Dark Cloud Cover candlestick pattern below the channel top (not shown), hinting at deeper losses ahead. Initial support lines up at $1526.22, the intersection of a minor rising trend line and the 38.2% Fibonacci retracement of the 4/12-5/2 advance. A break below this boundary exposes $1510.53 and $1494.83, the 50% and 61.8% Fib levels, respectively. Near-term resistance stands at $1545.65.

Inflation expectations as tracked by US breakeven rates – the spread between yields on regular and inflation-indexed US Treasuries of equivalent maturity – remain the top driver of directional momentum. With that in mind, further losses appear likely after the drop over the past two days. Indeed, if traders are already looking ahead to higher borrowing costs after the expiry of QE2 in June (as noted above), fears about runaway price growth ought to subside and bring the yellow metal lower as demand for an inflation hedge dissipates. While it is too early to tell if this is in fact taking place, stock index futures are pointing sharply lower overnight to hint that the unwinding of QE2-fueled bets on risky assets is already underway and reinforcing the likelihood that ever forward-looking traders are already starting to operate on the assumption of a world where borrowing costs are materially higher than they are today.

Spot Silver (NY Close): $41.57 // -2.25 // -5.13%

Prices have taken out support at the bottom of a rising channel set from late January, pausing at the 38.2% Fibonacci retracement of the 1/28-4/25 rally at $40.83. A break below this barrier exposes the 50% Fib at $38.07, while a bounce sees initial resistance at $44.25.

A strong correlation between silver and the one-year break-even rate suggests that as with its more expensive counterpart, the metal is likely to decline as traders reposition for an increase in yields after QE2 runs its course in June. Selling pressure has been compounded by the CME’s 12 percent increase in margins on silver futures contracts. The gold/silver ratio has jumped to the highest in a month, breaking the downtrend in place from late January and hinting the cheaper metal will underperform over the days ahead.

(Source: http://finance.yahoo.com/news/Crude-Oil-Gold-Decline-as-fxcm-1206754285.html?x=0&.v=1)