Gold, silver show sharp drops, oil yawns

Oil continues to eat cake by the ocean

The oil market’s long summer holiday continues, with oil retreating overnight, but still range-trading in the bigger picture. A stronger US dollar was the catalyst for oil to ease overnight. Brent crude fell by 1.0% to USD44.50 a barrel. WTI fell 0.75% overnight to USD41.50 a barrel.

A fall in US API Crude Inventories by 4.4 million barrels, the 3rd sizeable weekly fall in a row, has supported prices today, both contracts rising by around 20 cents a barrel. Official US Crude Inventories are also expected to fall this evening, by 3 million barrels, which should support prices. However, despite the enormous falls in inventories over the past few weeks, the data has not been enough to shake oil out of its monthly trading ranges. A stronger US dollar will also partially negate any headline inventory fall.

Both contracts look set to continue in much the same vein. Brent crude has resistance at USD46.00 a barrel with nearby support around USD44.00 a barrel. A failure could induce further losses towards USD42.00 a barrel. WTI has struggled near USD43.00 a barrel, and failure through USD41.00 a barrel could see a further correction to USD40.00 a barrel.

Even if the worst scenario plays out, though, both contracts will merely have moved to the lower end of their monthly trading ranges. That is not a material cause for concern in itself. Oil is on investors’ radar, with the FOMO crowd licking wounds elsewhere. The long summer hiatus looks set to continue for a while yet.

Gold collapse exceeds expectations

Gold and silver collapsed overnight, as the long precious metals FOMO herd suffered an aggressive culling of numbers. Gold fell by 5.70% from USD2028.00 to USD1912.00 an ounce. Silver fell by a gigantic 15.0% to USD24.80 an ounce. Both metals were wobbling overnight as longs got nervous, with higher US yields and a stronger greenback administering the coup de grace.

Trading has been volatile in Asia. Both gold and silver initially posted impressive gains as the buy-the-dip herd tentatively remerged. That rallies were soon snuffled out though as the US dollar continued to strengthen in Asia, suggesting the buyers were fast money with little tolerance for pain. Gold has now fallen another 1.10% to USD1891.00 an ounce, and silver is 2.25% lower at USD21.6600 an ounce.

The fall in gold has exceeded my wildest expectations, which were around USD1940.00 an ounce. If nothing else, it highlights just how much fast money had entered the long gold trade above USD2000.00 an ounce. Both gold and silver are notorious for gut-wrenching corrections, even in bull markets, and so it seems to be playing out today.

The price action is suggestive that longer-term buyers are not out in force at these levels, likely waiting for lower prices still. With US yields and the US dollar moving higher, with more gains likely, that strategy will probably pay dividends for the rest of the week. Gold and silver price action will be dominated by bottom picking fast money, that heads for the exits just as quickly.

Gold’s intra-day low at USD1881.50 an ounce provides initial support. However, beyond there, I can see no material support until the USD1800.00 an ounce region. Silver has fallen through USD24.0000 an ounce and could potentially target USD22.0000.

Like a Dirty Harry movie, bullish gold investors will have to decide if they have a short-term horizon, in which case, “do you feel lucky, punk?” Or, whether from a long-term horizon, being greedy over another USD50.00 an ounce, is worth missing a material dip. Such is the nature of human psychology in trading and investing.

I note that US interest rates may tighten in the near-term but are going to be on the floor for years. Similarly, the galactic amounts of quantitative easing globally are set to continue and are unlikely to be positive for fiat currencies. Gordon Gecko was incorrect when he said, “greed is good”; it’s only good some of the time.

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