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Oil finds support as gold fluctuates

By Ole Hansen

The focus in financial markets stayed with Greece and the potential implications for currency and commodity markets. The fiscal debt problems that caused a flight to secure government bonds and the dollar away from commodity and equity markets still lingers as Germany made clear that they were not willing to pull out the cheque book.

Chinese bank lending in January rose more than the previous three months combined thereby underlining the risk of the economy overheating with higher inflation as a result. This prompted the Chinese Central Bank on Friday for the second time this year to raise banks' reserve requirement. Chinese celebration of New Year will leave some markets closed most of next week and reduced activity is expected. There were mixed signals in energy markets as Opec released a downbeat assessment of oil demand for 2010.

They now only expect global demand to pick up by 800,000 barrels a day which is in contrast to the International Energy Agency (IEA) and the Energy Information Administration (EIA) forecast for a rises of 1.2 and 1.44 million barrels a day respectively. Most, if not all, of the increase in demand will be from emerging markets and should China pull the breaks even further we could see prices come under pressure later in the year.

Commodity markets spent most of the week trying to recover from the wash out last Friday when the panic about sovereign debt fear reached new highs.

In the days that followed the CRB index managed to rise five per cent before the Chinese hike in reserve requirements drove the dollar to a new 2010 high versus the euro and put the fragile recovery in commodities under pressure.

The energy sector did, however, managed to rise as most of the US was hit by another round of severe winter weather increasing the demand for heating oil. Crude in US storage rose to October 2009 levels and Gasoline rose to 1999 levels clearly showing that the market continues to be well supplied. This leaves prices nowhere to go fast over the coming months.

While we wait for further clarification about the health and speed of the global recovery range trading between $65 and $85 seems to be the most likely outcome.

Technically the bulls have found their footing again after the firm rejection below $70 with $68.50 now confirmed as a major level of support. However, the downward sloping channel from the December highs at $75.45 held once again and only a break above would signal upside potential initially towards $76.75 followed by $78.

Gold continues to be trading at the mercy of fluctuations in the value of the dollar. The five per cent rally from the previous low last Friday was driven by profit taking on long dollar currency positions. The combination of Germany's lukewarm approach to a Greek solution and China's hike in reserves requirements turned the market lower once again.

The world's biggest gold ETF, the SPDR Gold Trust, only saw 0.5 per cent redemption during the six per cent sell off last week indicating that investors still view the current phase as a correction instead of change in direction.

The upside is currently capped by resistance at $1,109 being the trend line from the December 2009 high while support is the recent low at $1,045 followed by 200 day moving average at 1,026.50.

Industrial metals could suffer the most from the Chinese tightening as traders will be wondering how long this process will last and what kind of impact if will have on current economic activity. HG Copper for May delivery which rallied 12 per cent from the $283 low last Friday went searching for support as the rally was abruptly halted.

Silver failed to outperform gold during the recent rally with the technical picture not looking that healthy. Given its weaker fundamentals, silver could be more vulnerable than gold if the dollar continue to make new highs. The 200-day moving average at $16 signals strong resistance with $15.75 being the high this week. A break below $15.25 could signal a resumption of the sell off with a target of $14.64 followed by $13.50.

The author is Senior Manager for CFD and Listed Products with Saxo Bank. The views expressed are his own


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