By Barani Krishnan
Investing.com -- Oil was back in the red last week and gold finished above $1,800 the first time in a month. While Omicron fears were blamed for the first and inflation for the second, there was a third, less perceptible, factor for both that could become more obvious the coming week: thinning year-end volumes that exacerbate moves either way, exaggerating volatility.
Last week was probably the final one in the 2021 calendar where trading desks were running at full strength, before year-end vacations kicked in. The fewer hands left on deck in the coming week, with possibly reduced numbers of day-time traders too, will mean “trading will remain very choppy for the rest of the year as investors grapple with falling volumes over the coming sessions,” said Ed Moya at online trading platform OANDA.
Where that will leave crude and bullion in the coming week is anyone’s guess.
From the oil producers in OPEC to the rest of the bulls across the energy spectrum, Omicron is a scare — or worse, hoax — that will barely dent crude demand for the coming year. OPEC sees the world consuming 99.13 million barrels per day in the first quarter of 2022, up 1.1 million from its November forecast.
Global health authorities maintain that the variant shouldn’t be taken lightly.
Rochelle Walensky, head of the Centers for Disease Control and Prevention, said Omicron cases were "increasing rapidly" and the variant was expected "to become the dominant strain in the United States as it has in other countries in the coming weeks."
President Joe Biden warned this week that unvaccinated Americans face “a winter of severe illness and death.”
U.S. infections from Covid have surged 40% over the past two weeks across the country, and deaths have increased by more than a third during that same period, with more than 1,300 Americans dying of coronavirus daily.
But the CDC’s Walensky and other other global health officials have also repeatedly said the severity of Omicron’s impact as a variant — i.e. how gravely it can make people ill or kill them — is not known. While the Omicron variant has emerged in people who have been inoculated, officials say there is no evidence of it making them seriously ill.
As protection, health authorities have urged people to get booster shots, to acquire fresh immunity against the strain. Those opposed to Covid vaccinations, however, accuse health authorities and governments like the Biden administration of overhyping concerns about the virus. Vaccines aside, lockdowns and other home-based quarantines, as well as forced remote-learning for school kids, have been among the most politically divisive issues around the two-year long pandemic.
The stand-offs are expected to continue in the year ahead.
In gold’s case, how long it will ride the inflation wave higher before succumbing to the chokehold of a tightening Federal Reserve remains to be seen.
While bullion has certainly demonstrated a greater showing as an inflation hedge in the latter half of the year, gold bears remain in the shadows, ready to pounce once the dollar’s rally, or the reemergence of a Treasury bill spike, become too much to ignore.
Gold’s hold above $1,800 looks tenuous, though it also could break new ground into $1,900 and above. Keep your seat-belts fastened in the coming week.
Oil Market Activity & Price Roundup
London-traded Brent, the global benchmark for oil, settled down more than $2.00, or over 2%, at $72.98 a barrel, after a session high of $74.97 and bottom of $72.65. For the week, Brent was down 3.3%. The global crude benchmark gained 7.5% last week after losing 18% six weeks prior when it fell to a four-month low of $65.80 from seven-year highs of $86.70 in mid-October.
West Texas Intermediate, the benchmark for U.S. crude, settled down $2.08, or almost 3%, at $70.30 a barrel, after oscillating between a session peak of $72.25 and low of $69.94. Week-to-date, WTI was down 1.1% after last week’s outsized gain of 8.2%. Prior to that, U.S. crude had been down for six weeks back-to-back, losing 20% in all and falling to as low as $62.48 from this year’s peak of $85.41.
WTI Technical Outlook
Sunil Kumar Dixit, chief technical strategist at skcharting.com and a regular contributor of commodity technical outlooks to Investing.com, says the following for WTI in the coming week:
"The price action throughout last week reflected a bearish mood for WTI, which failed to clear above the middle Bollinger Band on the weekly chart positioned at $73.90 despite a positive Stochastic crossover.
"Going into the week ahead, U.S. crude can retest the 50-week Exponential Moving Average of $67.50 before attempting a test of $73.90.
"A move below $67.50 may extend bearish pressures to $61.60 and the 100-month Simple Moving Average of $59.65 and the 50-month EMA of $58.15.
"It is also important to note that a break below $59 will flip the mid-term outlook to bearish."
Gold Market Activity & Price Roundup
Almost a month after losing its $1,800 mantle, gold is back above the key psychological bullish mark, reinforcing its role as an inflation hedge.
U.S. gold futures’ most active contract, February, settled Thursday’s trade up $6.70, or 0.4%, at $1,804.90 an ounce on New York‘s Comex. The last time it closed above $1,800 was on Nov. 22.
For the week, February gold rose 1.1%, its most for a week since early November.
Gold’s ascension came as the Federal Reserve announced its heightened concerns about inflation in the United States on a week that the central bank laid out an expedited pathway to ending its pandemic-era stimulus and raising interest rates for the first time since the Covid-19 outbreak of March 2020.
“Gold is taking the news that central banks are tightening monetary policy and tackling inflation head-on very well,” said Craig Erlam, analyst at online trading platform OANDA.
“You would be forgiven for thinking this would be a negative development for the yellow metal and, in the longer term, I expect it will be. But it's also a development that was almost entirely expected and priced in.”
News of rate hikes are almost always bad for gold. This time though, traders in bullion appear focused on the U.S. inflation story, allowing gold to play its traditional role as a hedge against that, although strong Fed action to right the situation could still be negative for the yellow metal.
The U.S. Consumer Price Index, or CPI, rose 6.8% in the year to November, growing at its fastest pace since 1982, just as it did in October, the Labor Department reported last week. It also announced that U.S. producer prices jumped by a record 9.6% year-on-year in November.
Gold Technical Outlook
Dixit says the following of the spot price of gold:
"Gold broke below its recent swing lows of $1,761 and $1,758, and followed a down spike to $1,753, before showing its resolve to reject bearish pressures and steered violently through a cluster of resistances at $1,775-$1,785-$1,798 and clocked $1,814 settling for the week at $1,798 (slightly above the 50% Fibonacci level).
"While the stochastic reading of 25/30 continues to be bearish, the Relative Strength Indicator begins to point north, indicating further gains in the week ahead.
"Going into the new week, gold is likely to retrace downward to $1,785-$1,775 before extending the rally to $1,825, which is a 38.2% Fibonacci level, and test the $1,833 vertical resistance, which may decisively turn the stochastic and RSI to north."
* Note: I will be out the next two weeks and the Weekly Review and Outlook on Energy & Precious Metals will resume publication on January 9. Happy New Year to all.
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.