Gold retreats while WTI Crude records monthly high

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  • Thursday, 01 Jul 2010

GOLD started last week by making a new record high at 1265 when China, the world’s third-largest economy, allowed more flexibility in the yuan rate. A stronger yuan will increase the purchasing power of Chinese investors. However, gold prices failed to sustain the record high as investors took profits in markets thus triggering the biggest slide in a month to 1230.

The yellow metal climbed again on European ongoing debt default and inflation concerns. The prices reached 1246 but were eroded by the US dollar’s rally and suppressed to 1225. The flight off Europe seems to be subsiding and gold is beginning to poise against the dollar again. Market investors for gold were disappointed for not being able to surge further after it attempted a new high to 1265.

After the FOMC (Federal Open Market Committee) meeting, gold rose after the Federal Reserve (Fed) said it would keep US borrowing costs low for an extended period, which may weaken the dollar and boost the appeal of the precious metal. The Fed does not have many financial bullets left to add stimulus to the economy through monetary policy while undermined by gold’s relationship to US assets. Gold ended the week at 1255.

WTI Crude started last week at 77.3 and spiked up to 79.9 in a knee-jerk reaction after China signalled it will relax the yuan’s peg to the dollar. As investors digested the news that the impact is likely to be neutral in the short term and more beneficial in the medium to long term, focus has shifted back to the sustainability of the recovery in US commodity demand. WTI Crude came back down to 77.6.

US oil inventories were at the highest level for the period since 1990. It made the eighteenth gain out of 21 weeks by increasing 2.02 million barrels to 365.1 million barrels. The US sales of new homes declined by 33% in May to a record low as tax credits expired. This is bearish for both the economy and for demand for oil.

Last Friday, WTI Crude rose the most in two weeks on concerns of possible disruption in the Gulf of Mexico by an expected oncoming hurricane season. The anticipation from market players ticked oil prices higher as a hedge against potential risk in future. WTI Crude closed the week at 79.1 and we expect some fluctuations in the coming week.

Technical analysis

Gold topped a new marginal high at 1265 regions last week and dropped below the breaking neckline at 1250 again. Currently, the market threads between 1225 and 1265 regions with a possibility to re-test the high. Breaking the top 1265 may effectively lift the trend to 1285 regions while hovering below 1250 will reveal gradual weakening strength.

Being ambivalent, we have to observe fundamental influences on the market direction this week.

WTI Crude went down last week to 75.2 regions before bouncing back to recover all losses on Friday. Although the market is still consolidating, the price pattern suggests a bullish bias.

Henceforth, breaking above 80.0 level may confirm the continuation of an upward trend. Traders may wish to consider establishing long position if market retreats to 77.2 regions with risk control placed at 76.3 regions.

DAR Wong, Paul Chung and Wahyu PY are the research team of You may reach them through the website

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