By Kathleen Brooks, EMEA Research Director at FOREX.com
Both gold and silver have seen weakness during Q4 2012, both declining approximately 2%-3%, reflecting concerns about the US going over the fiscal cliff which would have led to higher tax rates that could send the US into a potential double-dip recession.
Historically, this would usually see precious metals rally as it may spark the Federal Reserve to be even more accommodative, however with "QE infinity" already in place and rates pledged to be kept low into 2015, the Fed wouldn't have had much ammunition left. We envisage a further correction; however this may attract some buying interest in the yellow metal, as the US politicians have come to an agreement regarding the fiscal cliff.
There may be some buying interest around the $1640-60/oz level, which is a key support zone. This sees the 200-day SMA, 50% retracement (of the May-October rally) as well as the June 2012 high, and just below there, sees the bottom of the weekly Ichimoku Cloud and the 100-week SMA between $1620-30. Ultimately we feel the yellow metal could see a move back towards the 2012 highs around $1,780 to $1,800 before the end of March. As for Silver, we think pullbacks towards $30-$32/oz, which sees the 100 & 200-day SMA's as well as a key low in November, may be seen as an attractive area to express optimism. Buyers may then search for a test of the $35-$37 area as we move throughout the first quarter.
Furthermore, we believe the lack of practical safe-haven investments, combined with the globally low interest rate environment and extremely accommodative monetary policy, underpins our bias for slightly higher precious metals price in Q1 2013.
While geopolitical concerns in the Middle East have increased of late, namely in the Gaza strip, since this is not an export heavy region, it is unlikely to lead to supply disruptions in the oil market. That said, tensions between Turkey and Syria still persist and issues with Iran have been ongoing - both could potentially affect the supply of oil should this escalate to other nations in the Middle East. While we ultimately believe cooler heads will prevail, these elevated risks could see crude spike at times.
However, our overriding outlook continues to foresee slowing global growth and consequently should continue to persist in undermining demand. Furthermore, while immediate short-term supply has been disrupted due to super storm Sandy in the US, production in North America overall looks set to pick back up over the current quarter.
Source: Forex.com and Bloomberg
When combined (slowing demand & increased supply), we feel it could continue to have a downward impact on both UK Oil (Brent) and US Oil (WTI) prices through much of Q1 2013. Interestingly, we believe the spread between UK and US oil could remain at elevated levels ($20-25) for the foreseeable future as long as bottlenecks in the supply of oil (mainly in the southern US) remain and tensions exist in the Middle East. Accordingly, we believe UK Oil could see a move back towards $102/$106 and US Oil trade lower to $83/$86 over the coming months.