Crude Oil Declines on Profit Taking, Gold Pauses but New Records May be around the Corner

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/commodities/2010/12/31/Crude_Oil_Declines_on_Profit_Taking_Gold_Pauses_but_New_Records_May_be_around_the_Corner.html

Commodities – Energy

Crude Oil Declines on Profit Taking

Crude Oil (WTI) - $91.17 // $0.05 // 0.05%

Commentary: Crude oil fell $1.28, or 1.4%, to settle at $89.84 despite a plunge in petroleum inventories. Traders decided to take profits after a remarkable run that saw most crude benchmarks approach the mid-$90’s. Remember that WTI is an anomaly, discounted due to a glut at Cushing, which is the land-locked NYMEX delivery point. Other benchmarks such as UK Brent and US LLS reached almost $95 and $97, respectively. We would now look for buying opportunities in the event of any meaningful correction in prices. Something in the mid-$80’s for WTI starts to look attractive.

In terms of news flow, next week there is a lot of data, starting with the official China PMI Manufacturing figures set to be released on Saturday. The unofficial HSBC figure showed a slight deceleration in manufacturing activity in December, as the index fell from 55.3 to 54.4. A hard landing in China remains the biggest risk to crude prices in 2011. It is not our base case, but the possibility exists.

Technical Outlook: Prices declined after showing a bearish Harami candlestick pattern below resistance at the upper boundary of a rising channel set from August, finding support at the 23.6% Fibonacci retracement at 11/17-12/27 rally ($89.09). Continued selling targets the 38.2% Fib at $87.36. The 12/27 wick high at $91.88 marks immediate resistance.

Commodities – Metals

Gold Pauses but New Records May be around the Corner

Gold - $1407.78 // $3.10 // 0.22%

Commentary: Gold fell for the first time in five sessions to settle $7.07, or 0.5%, lower at $1404.68. An excerpt from our latest Gold – FOREX Correlations report:

“Gold ETF holdings fell a modest 120K troy ounces from last week, but that didn’t stop gold from advancing almost $23. It once again looks like the tail is wagging the dog though, for while gold rose about 1.8%, silver rose by almost 5% to reach another thirty year closing and intraday high. Gold, on the other hand, failed to breach its record high above $1431. In turn, the gold/silver ratio plunged to 45 at one point, the lowest level since April 2006.”

Technical Outlook: Prices put in a Bearish Engulfing candlestick pattern below resistance at $1414.34, the 14.6% Fibonacci retracement of the 10/22-12/7 rally. A decline from here that takes out the rising trend line connecting major lows from late October would confirm a Head and Shoulders top, with the subsequent drop tentatively aiming for a measured target at $1275.16.

Silver - $30.65 // $0.21 // 0.69%

Commentary: Silver fell slightly, shedding $0.15, or 0.49%, to settle at $30.44. Prices have closed above $30 for three days this week so far. Before that there had only been once close above that level (earlier this month) in the last thirty years. Prices look poised to move even higher as investor interest in the metal remains strong.

The gold/silver rebounded to 45.9, but remains 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 put in a bearish Shooting Star candlestick following a test of the 30-year high at $30.70, with negative RSI divergence hinting that a double top may be in the works. Initial support lines up at $29.55, the 14.6%Fibonacci retracement of the 10/22-12/07 rally.

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