Crude Oil Pauses to Digest Recent Gains, Gold Surges to Records on Mention of QE3

Commodities – Energy

Crude Oil Pauses to Digest Recent Gains

Crude Oil (WTI) - $89.08 // $0.30 // 0.34%

Commentary: Monday was a day of pause for financial markets as risk assets consolidated the huge gains from last week. Crude managed to eke out a $0.19, or 0.21%, gain to settle at $89.38 after spending most of the session with minor losses. Similarly, U.S. equities finished mixed, with major indices closing on either side of the unchanged mark.

Many market participants took their cues from a broadcast interview with Fed Chairman Ben Bernanke. The Chairman maintained a cautious outlook on the U.S. economy, but indicated that the central bank stands ready to provide additional support if necessary. He even indicated that a third quantitative easing program was a possibility. This is all unequivocally bullish for risk assets, including crude.

We continue to expect that prices will advance well into the $90’s before any meaningful correction. There are no notable economic events for Tuesday, thus oil may take its cues from movements in U.S. equities. There too the bias is higher.

Technical Outlook: Prices have stalled having taken out resistance at $88.63, the 11/11 swing high, with negative RSI divergence hinting the rally may not have much space to continue. Initial resistance stands at $90.65, the intersection of the 123.6% Fibonacci extension of the 11/11-11/17 downswing, and the top of a rising channel carved out since late August. The $88.63 level has been recast as near-term support.

Commodities – Metals

Gold Surges to Records on Mention of QE3

Gold - $1421.07 // $2.68 // 0.19%

Commentary: Gold advanced to a new record high on Monday, adding $9.68, or 0.68%, to settle at $1423.75. There is no specific catalyst we can point to for the move, as the drivers of gold have been well established for some time now.

As we mentioned in the crude section above, Fed Chairman Ben Bernanke noted in an interview that ‘QE3,’ or a third quantitative easing program, was a possibility. In other words, monetary policy will stay loose for a long time to come—obviously bullish for gold.

With prices rising so rapidly, it is only a matter of time before those with enormous gains opt to lock in those profits, spurring profit taking. We would look to the technical outlook for guidance.

Technical Outlook: Unchanged from yesterday: “On a daily closing basis, gold finished last week at a new record high. However, acute negative RSI divergence hints bullish momentum may not have much staying power. Resistance stands at $1424.60, the 11/9 wick high, while initial support lines up at the 14.6% Fibonacci retracement of the 7/28-11/9 advance ($1385.53).”

Silver - $30.07 // $0.08 // 0.25%

Commentary: Silver settled over $30 for the first time in 30-years, with the metal advancing $0.74, or 2.53%, on Monday. The only way to describe this ascent is “parabolic” with the move reminiscent of many bubbles throughout history. On the other hand, the huge influx of capital into silver ETFs and other financial products is a game changer, thus we aren’t ready to jump to any conclusions.

The gold/silver ratio fell again and now stands at 47.2, the lowest level since February 2007. (The gold/silver ratio measures the relative performance of the two precious metals. A higher ratio indicates gold outperformance, while a lower ratio indicates silver outperformance).

Technical Outlook: Silver has stalled ahead of resistance at $30.39, the 123.6% Fibonacci extension of the 11/9-11/16 decline, with negative RSI divergence hinting the path of least resistance leads lower. Initial support lines up at $29.36, the 11/9 swing high.

FOREX: All Eyes on Ireland with Budget Vote to Guide Euro, Risk Sentiment

Key Overnight Developments

• Aussie Dollar Unmoved as RBA Leaves Rates on Hold
• UK Retail Sales Growth Slowed in November, Says BRC

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3261	1.3395
GBPUSD	1.5682	1.5824

The Euro and the British Pound tracked modestly higher in overnight trade, adding 0.1 and 0.2 against the US Dollar as the greenback faced broad-based selling pressure amid uptick in risk appetite across Asian stock exchanges after Australia signaled an indefinite pause in its rate hike campaign (see below).

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
AUD	22:30	AiG Performance of Construction Index (NOV)	42.2	-	44.0
NZD	23:00	QV House Prices (YoY) (NOV)	0.3%	-	1.1%
JPY	23:50	Official Reserve Assets (NOV)	$1101.0B	-	$1118.1B
GBP	0:01	BRC Retail Sales Monitor (NOV)	0.7%	-	0.8%
CNY	0:01	China Manpower Survey (1Q)	38%	-	51%
AUD	0:01	Australia Manpower Survey (DEC)	21%	-	20%
NZD	0:01	New Zealand Manpower Survey (1Q)	16%	-	15%
JPY	1:00	Japan Manpower Survey (1Q)	7%	-	6%
AUD	3:30	Reserve Bank of Australia Rate Decision (DEC)	4.75%	4.75%	4.75%
JPY	5:00	Coincident Index (OCT P)	100.7	100.8	102.1
JPY	5:00	Leading Index (OCT P)	97.2	97.3	98.6

The Reserve Bank of Australia kept interest rates on hold at 4.75 percent as widely expected, with RBA Governor Glenn Stevens reinforcing a neutral outlook for policy going forward, saying the central bank views the current setting of monetary policy as “a little above average” and “appropriate for the economic outlook”, mirroring the dovish language he used in parliamentary testimony in late November. The outcome did not prove significantly market-moving for the Australian Dollar, with traders getting next to no new information out of the outcome.

UK Retail Sales growth slowed in November, with receipts adding 0.7 percent from the previous year according to a report from the British Retail Consortium. BRC Director General Stephen Robertson repeated familiar warnings about customers cutting back amid lingering worries about employment and household finances, adding that “if there is good news, it’s that the [government’s proposed spendingcuts] have not made things worse.”

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
GBP	-	NIESR Gross Domestic Product Estimate (NOV)	-	0.5%	Low
CHF	6:45	Unemployment Rate (NOV)	3.6%	3.5%	Medium
CHF	6:45	Unemployment Rate s.a. (NOV)	3.6%	3.6%	Medium
GBP	9:30	Industrial Production (MoM) (OCT)	0.3%	0.4%	Medium
GBP	9:30	Industrial Production (YoY) (OCT)	3.9%	3.8%	Medium
GBP	9:30	Manufacturing Production (MoM) (OCT)	0.3%	0.1%	Low
GBP	9:30	Manufacturing Production (YoY) (OCT)	5.4%	4.8%	Low
EUR	11:00	German Factory Orders n.s.a. (YoY) (OCT)	18.6%	14.0%	Low
EUR	11:00	German Factory Orders s.a. (MoM) (OCT)	1.9%	-4.0%	Medium

Economic data is likely to play second fiddle to risk sentiment in European hours, with traders looking past a set of second-tier releases to focus on the outcome of Ireland’s 2011 budget voteas well as the rhetoric emanating out of Brussels as European Union finance ministers debate an expansion of theEuropean Financial Stability Fund (EFSF).

In Ireland, the ruling Fianna Fáil party lost a key by-election in late November, narrowing its majority in parliament to a meager two MPs, both of whom are independents. Should they withdraw their support and the budget vote fails, the agreements on securing EU/IMF aid reached over recent weeks will prove essentially moot, an outcome that is likely to weigh heavily on the Euro and risk-sensitive currencies at large.

Meanwhile in Brussels, Belgian PM Didier Reynders has broken ranks with France and Germany to suggest that the EFSF ought to be expanded, adding that officials will also discuss the outlook forPortugal. While markets may have rewarded the Euro if Reynders’ attempt to be proactive were met with broad-based support, his attempt at taking the initiative seems to have done quite the opposite, highlighting ideological divisions within the regional bloc and shifting the spotlight from what is still likely to be a successful budget vote in Ireland to the next probable victim of the sovereign debt crisis. On balance, this may prove to undermine the single currency, muting near-term optimism even if Dublin should keep its house in order.

Scanning the docket, Switzerland’s Unemployment Rate is expected to tick higher to 3.6 percent in November, marking the first increase in 10 months. Meanwhile, UK Industrial Production growth is expected to accelerate, with output adding 3.9 percent in October, while German Factory Orders add 1.9 percent having plunged 4 percent in the previous month.