Complex Made Simple

WTI crude rises, gold falls

WTI (West Texas Intermediate) Crude and gold went through a relative see-saw price action in May, with WTI rising towards $50 per barrel and gold falling all the way from above $1,300 per troy ounce to a three-month low just below $1,200 at the end of the month.

 

The gold market was shaken up by the unexpected reversal in US interest rate expectations for 2016, leading to a complete resurgence in dollar strength throughout May. While markets were pricing in a near-zero percent chance of a US rate rise just a few weeks ago, this has now also reversed, jumping at one point to over 60 percent.

 

Given that the critical support level between $1,190 and just above $1,200 for gold has come back into play, I expect that sellers will await a close below $1,190 before pricing in further declines. We must remember that the markets have still not completely priced in a US interest rate rise for June or July, meaning there is still room for some further dollar strength that could spell further pressure for gold.

 

While gold dropped, on the other side of the see-saw was WTI Crude oil, which was busy rising for most of May. At the time of writing, WTI has not managed to push definitively through the $50 level, although the Brent Crude benchmark did briefly leapfrog over $50 at the end of the month before settling at the $49 mark.

 

The general headlines across the global news front are focusing mainly on the upcoming Brexit referendum and the outlook for US interest rates, turning the steadily increasing momentum in the oil price into background noise, but it is significant in view of the depressed price levels seen throughout 2015.

 

The price of oil technically failed to close below $42 on a weekly basis, which was the previous psychological resistance and this has encouraged buying momentum, even in the face of a continuing strong supply from OPEC member states. Sellers are still waiting for the $48.50 to $50 range to firm up and we’re going to need to close above $50 for a further wave higher. Otherwise, I can see that the price will still be prevented from moving above $50.

 

Still to be priced in is the very small chance that OPEC members will agree to change production volumes. There have been some encouraging reports from both OPEC and the IEA that global inventories are set to suffer a dramatic decline over the second half of the year, which is very encouraging for the price bulls, while strongly suggesting that the overwhelming fundamental weight of the oversupply is weakening.

 

The fall in the gold price and rise in WTI Crude trends are sending the message that risk appetites are sharpening, even amid the global slowdown. Profit-taking is nonetheless still a major part of the calculated risks being taken by investors and I expect to see this prevail, at least until the Brexit referendum is over.

 

One of the factors that could impact gold going forward into June is safe-haven buying due to uncertainty over the Brexit, although it should be noted that it’s the GBP that’s taking the real brunt of investor concerns.

 

The other point to consider is the main signal coming from the Federal Reserve: if the hawkish mood over interest rate hikes fades away, gold may get another boost in the short term.