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Commodities Week Ahead: Gold Tests $2,000, Oil Below $60 Without Quick Rebound

Published 03/20/2023, 05:57 PM
Updated 08/14/2023, 06:57 PM
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  • Fed week being crowded out with the US-to-Europe banking crisis
  • Gold has a path to a new record high above $2,073, but profit-taking likely first
  • In oil, WTI could go beneath $60 without a rebound, though $58 might be bottom
  • With gold testing $2,000 and U.S. crude potentially eyeing a break below $60, this is supposed to be the week of the Federal Reserve, as the world awaits the chairman of the most powerful central bank to share his outlook on the inflation, growth, and interest rates of what is also the globe's most influential economy.

    Instead of having the stage to itself, the Fed is in contention this time with one, two, three — perhaps dozens — of banks running the gamut of some of the most little-known regional names in the United States to at least one big investment type in Europe.

    The Fed aside, these banks are all in the news for the same reason — not-so-good news about their finances. Leading the pack is Zurich-based Credit Suisse (SIX:CSGN), which despite news of a takeover by larger compatriot UBS Group (SIX:UBSG), barely made investors feel safe about the global economy.

    It is against this backdrop that gold got to 11-month highs, briefly breaking above the much-eyed $2,000-an-ounce mark in Monday's Asian trading.

    The rush towards safe havens came even as UBS announced that it would buy beleaguered peer Credit Suisse in a "historic deal" facilitated by regulators and intended to help ease concerns over a banking crisis that began in the United States last week with the collapse of mid-sized Silicon Valley Bank and Signature Bank.

    In gold's case, it isn't just banking geopolitics that's at work.

    "The market may need to go lower before rebuilding toward a new peak that will rewrite the August 2020 record high of $2,073," said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

    He adds:

    "Overall, the broader perspective favors a retest of the record high of $2073, or at least $2068. We are going to witness either a strong correction from near $2,068-$2,073 or a new high is going to be established if gold gathers enough velocity above $2073."

    As spot gold's 4-hour Relative Strength Index (RSI) reaches overbought conditions at 82, some pullback towards the support corridor of $1,965-$1,955 is a high probability, said Dixit.

    "This is likely before we embark on a further advance towards $1,998, a conservative initial target which is a doorway to the bigger target of $2,068-$2,073," he said.

    If momentum weakened below $1,965-$1,955, gold is likely to witness further correction towards the major support zones of $1932-$1928, Dixit added.

    In oil's case, both U.S. West Texas Intermediate, or WTI crude, and London-traded Brent crude fell back into the red briefly after trading higher at the Asian open.

    Crude prices fell 13% last week, hitting 15-month lows, on concerns that a banking rout could spill over into the broader economy, denting activity and potentially damaging crude demand. Fears of slowing demand have weighed heavily on oil markets this year, keeping prices largely depressed.

    Analysts at ING wrote in a note that fears of an economic slowdown and anticipation of the Fed meeting on Wednesday should keep markets volatile this week.

    "Broader market concerns weighed heavily on the oil market last week, while fundamentals have clearly not been strong enough to prop up the market."

    ING had also slashed its outlook for Brent prices this year to $90 a barrel from $98 a barrel, stating that $100 a barrel was appearing less likely.

    Dixit thinks U.S. crude — which settled on Friday at $66.74 per barrel, after a 15-month low at $65.27 — could go below $60 in the near term.

    "If we buck the $62 level and selling intensifies, expect a drop to the major support at the 100-Month SMA of $58.90," Dixit said, referring to the Simple Moving Average marker for WTI.

    But Dixit also thinks crude prices might rebound, even return to their most recent $70 perch, before going any lower than $58.

    "There's a strong possibility of a technical spring from the current lows. If it doesn't happen right away, it could upon reaching the support areas of $62 and $58.90. We have initial rebound targets at $69.20 and $71.50. We believe a technical rebound will start either from current lows of $65, as WTI has already tested the 200-week SMA of $66.18."

    Amid the banking ructions and fear of a global recession stand the Fed, which is expected to go for another 25-basis-point hike at its March 22 meeting.

    Wall Street, of course, wants the central bank to stop all rate hikes so that the S&P 500 can be driven up another 500 points. Fed Chair Jerome Powell is being cautioned that more monetary tightening could lead to another financial crisis like in 2008.

    That warning could be perceived as emotional blackmail in another name as the central bank is being told that the banking crisis is entirely the fault of its rate hikes, not reckless risk-taking by the executives of the financial firms that went under. So far, the Fed hasn't indicated it will back off from its bid to bring annual inflation, currently hovering at 6%, back to its long-held target of 2%.

    ***

    Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

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