Oil retreats, gold gains ground

Oil meets Covid-19 nerves

Oil prices retreated overnight as last week’s impressive rally continues to run into long-covering headwinds and falling momentum. Brent crude fell 1.20% to USD66.30 a barrel, retreating to USD66.05 in Asia. WTI fell by 1.70% to USD62.30 a barrel and has eased to USD62.05 in Asia. WTI’s demise being assisted by an unexpected rise in US API Crude Inventories on a quiet news night.

Overall, oil has run into two main headwinds. Firstly, the escalating Covid-19 situation in India, the world’s third-largest oil importer. Secondly, the apparent progress of talks in Vienna with Iran signalling a positive tone. That threatens to release more official Iranian crude onto global markets if sanctions are eased.

Nevertheless, the breakout by Brent crude through USD65.00 a barrel has to be respected. Although Covid-19 is threatening individual countries’ recovery, the overall picture in critical global markets is one of improvement.

Brent crude has support at USD65.50 and USD64.00 a barrel, with resistance at USD68.00 a barrel. It looks set to trade noisily between USD65.00 and USD67.00 a barrel for the rest of the week. WTI has support at USD61.50 and USD60.00 a barrel, with resistance at USD64.00 a barrel. Those levels should contain the trading range for the rest of the week.

Gold’s longer-term recovery continues

Gold has now very clearly traced out a major longer-term low around USD1680.00 an ounce over quarter one. That should set gold up for further gains to the USD2000.00 an ounce region in the weeks ahead. The main driver of the gold rally has been falling US yields of Q1 highs and a tempering of inflation concerns. Gold moving in a 100% inversely correlated manner to the US 10-year yield.

Therein lies the rub, with further gold gains entirely reliant on the direction of the US 10-year yield. In effect, gold has become a 10-year Treasury note. So, although the charts are screaming that a longer-term low is now in place, some caution should prevail, as I suspect the inflation story and higher US yields may yet return to haunt precious metals markets.

That said, gold rose strongly overnight, even as US yields and the US dollar moved in a narrow range, hinting that it may finally be picking up some shorter-term safe-haven flows as global risk sentiment soured. It is, however, far too early to say that its correlation to the US bond market is weakening.

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