Weekly Report Gold, Silver, Base Metals and Crude Oil

23 October 2010

The Macro-economic developments dominated the Commodity Market last week.

Treasury Secretary Timothy Geithner reiterated the US's 'Strong Dollar' policy, and People's Bank of China raised both the savings deposit rate and lending rates by +25 bps. Both moves pressured commodities,and prices were choppy throughout the week as speculations for QE-2 remained but some players worried that easing measures announced by the Fed migh be milder than previously expected.

Finance Ministers said, after the G-20 meeting in South Korea Saturday, that countries agreed to move to more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.

Also, the G-20 agreed to strengthen the IMF's role in managing the World economy and to allocate more voting rights to emerging markets.

According to IMF Managing Director Dominique Strauss-Kahn, policymakers agreed on the 'biggest reform ever' as, in order to increase the role of emerging markets, Europe will surrender 2 seats on the on IMF's 24-member Executive Board and a majority of countries will shift more than 6% quotas to under- represented countries.

World financial leaders have been striving to ease currency tensions stemming from Global economic imbalances.

Gold may fall in the coming week as the 'Joint Agreement' sends the signal that the policymakers' are serious about easing the tensions. However, we here at LTN doubt the effectiveness of these efforts and remain Bullish on the Gold in the long-term. Stay tuned...Paul A. Ebeling, Jnr. www.livetradingnews.com

Precious Metals

Gold retreated for the time in 6 weeks as USD bounced. The Benchmark contract fell to 1315.6, the lowest level in more than 2 weeks, before settling at 1325.1, down -3.42%.

As I mentioned above, the long-term outlook for Gold remains Bullish, as QE-2 from central banks and sovereign debt crisis in peripheral European economies are factors supporting the up-trend I believe.

The precious Yellow metal has been rallying over the past several weeks as speculations for Fed's return to QE weakened the USD.

As the US FOMC meeting approaches, the market set to worry that easing measures announced by policymakers may be less aggressive than the market has priced in.

This was one reason for the USD's recovery last week. In fact, I believe both situations, aggressive QE-2'ing or mild QE-2'ing, would be positive for Gold.

Should the US Fed announces measures that exceed market expectations, the USD will be under "extreme" pressure.

While weakness in USD benefits Gold, capital inflows for Gold as an inflation-hedge will also rise. Now, if the central bank disappoints the market by beginning the QE-2 will only a small amount, the USD may rebound temporarily. But, players will then begin to price in more Southside risks for US' economic recovery and action will likely cause a rise Gold buying as a safe-haven asset.

Silver: failure to test US$25 led to a rollover in Silver's price. On the Week, the Benchmark contract fell 4.82% making it the worst performer in the commodity sector. But, the decline paled when compared to the +36.5% rally since the beginning of this year.

Following Gold, Silver rose on speculation of Fed's QE-2'ing. Silver, the 'Poor Peep's Gold' has stayed at high levels after making a new 30 yr high last week.

At the same time, the Gold /Silver ratio has dropped to 56.13, the lowest level in more than 2 yrs, signaling Silver's out-performance vs.Gold.

Players should be cautious about a deep correction as it is uncertain how long investment demand can support Silver's rally as growth in supply has been out-pacing the demand.

Base Metals

Although the unexpected rate hike in China caused some profit-taking early, recovery was seen later last the week as sentiment remained positive for the base metals complex. But, due to divergence in fundamental outlook, price movements of individual metals differed.

Launch of a physically backed ETF on Base Metals has recently been a "Hot Topic" and impacts on the demand/supply outlook have been widely discussed.

Aluminum will likely be the 1st industrial metal ETF in the Market. Shayne and I expect an ETF should help eliminate the huge Aluminum stockpile and lend support to its price.

Having said that, the launch of a physically-backed ETF is not without risk, because notional storage costs for the base metals are much higher than for precious metals, and the cost of storage built into a physically-backed ETF will make it under-perform that of an index-linked ETF. As a physically-backed ETF increases demand and raises the price of a certain metal, higher metal price may induce substitution and eventually deteriorate the fundamental of that metal from our POV.

Crude Oil

Crude Oil moved in a choppy/volatile range last week, without any direction, with the WTI contract for Dec delivery ending the week -0.29% lower.

Crude Oil prices rebounded Friday on news that France is importing a large amount of fuel and using reserves to meet the market demand.

We believe the impact of French labor action on US Crude Oil supplies will be light, as the US has ample stockpiles.

Strikes, protests and demonstrations in France in opposition to a government bill to raise the age for a minimum pension from 60 to 62 have caused shutdowns of Crude Oil refineries and led to shortages of fuel there.

According to French Energy Minister Jean-Louis Borloo, the country is importing 120K cubic meters of fuel a day and has 7M cubic meters of fuel reserves.

Refinery disruption in France has raised concerns about Crude Oil supply to the US as France is the 4th largest gasoline exporter to Europe and a Key exporter to the US. But, again we believe that the impact will be limited, as the US has ample supplies, that is unless labor actions persist for a long period of time.

The US imported 12.602M bpd in July 2010, of which only +0.26% was from France. Considering Europe as a whole, the regions exported +16.7% of gas/oil/diesel to the US in Q-2 Y 2010 while exports of jet/kerosene were insignificant.

Note again that the fuel stockpile in the US is ample with both gasoline and distillate inventories holding markedly above 5-yr average. So, the temporary disruption in France should not have much impact on the US market.

The Overall Technical Outlooks for Gold, Silver and Crude Oil

Comex Gold (GC)

Gold's correction from 1388.1 continued last week, and the break of 1325.6 support confirmed that a short term Top has formed.

My initial bias will remain on the Southside this week, and a further fall will likely occur to 38.2% retracement of 1155.6 to 1388.1 at 1299.3 and perhaps below.

On the Upside: a break above 1349.6, the Minor resistance, will turn the bias back to the Northside for a test on 1388.1 first.

The Big Picture: the rise from 1155.6 is treated as the 5th wave of the 5 wave sequence from 1044.5, which should also be the 5th wave of the rally from 681 (2008 low).

While a short term Top is now in place at 1388.1, there is no confirmation of reversal in here. Recent up- trend could still extend further to 161.8% projection of 931.3 to 1227.5 from 1044.5 at 1449.6 before completion.

There is a long term projection target of 100% projection of 253 to 1033.9 from 681 at 1462 and there I see Strong resistance that is expected to bring on a medium term correction.

On the Downside: a break of 1266.5, Resistance turned Support, will be an early signal of a medium term reversal and will turn focus back to 1155.6 support for confirmation.

The Long Term Picture: the rise from 681 is treated as a resumption of the long term up-trend from Y 1999 low of 253. The anticipated correction did not happen and Gold will now likely climb further to 100% projection of 253 to 1033.9 from 681 at 1462 before making a Top IMO.

Comex Silver (SI)

Silver's correction from 24.95 continued last week and the break of 22.945, the Key support, confirmed that a short term Top has formed.

My initial bias remains on the Southside this week, and further fall should be seen to 38.2% retracement of 17.735 to 24.95 at 22.194 and perhaps lower.

On the Upside: a break above 24.075, the Minor resistance, will say that correction from 24.95 has likely completed and will turn bias back to the Northside for a target of 24.95 and higher.

The Big Picture: Silver's long term up-trend has resumed, and is showing signs of acceleration after taking out the medium term channel.

Next medium term target is now the 100% projection of 4.01 to 21.44 from 8.4, which is at 25.8 level.

And a break there will target 161.8% projection at 36.60.

On the Downside: a clear break of 19.845, Key support, is a must to then be the 1st sign of a reversal. Baring that action, my outlook is on Silver is Bullish.

Nymex Crude Oil (CL)

Crude Oil continued to experience choppy sideway trading last week. However, the downside is still contained above 78.04, Key support, and there is no confirmation of reversal in here.

The recent rally may extend one more time. But, even in case of another rise, I will continue to look for a reversal signal inside Fibo Resistance Zone of 82.97/87.15.

On the Downside: a break of 78.04, Key support, will say that the rise from 70.76 is done, and a deeper decline should be seen to retest this Key support level first.

The Big Picture: I am still favoring the case that medium term rally from 33.2 is finished at 87.15, and the recovery from 64.23 is treated as a correction, and should be near to completion, if not finished.

Even in case of another rise, strong resistance should be seen as Crude Oil enters into the Fibo Resistance Zone of 82.97/87.15 and trigger a reversal. That being said, I am still expecting a fall to 60, the Key psych mark, 50% retracement of 33.2 to 87.15 at 60.18.

But, a clear break of 87.15 will put focus on long term fibo level at 50% retracement of 147.27 to 33.2 at 90.24 next.

The Long Term Picture: the current development suggests that the rebound from 33.2 finished at 87.15, inside 76.77/90.24 Fibo Resistance Zone as expected.

The price actions from 147.27 are treated as consolidation in the larger up-trend, and with 90.24, the Fibo Resistance intact, a test of 33.2 eventually is in my call now.

But, a clear break of 90.24 will tell me that Crude Oil will bring on a stronger rally to above 100, the Key psych, mark, as a relatively powerful 2nd wave of the consolidation continues on.

Paul A. Ebeling, Jnr.

www.livetradingnews.com

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