Gold Pullback May Prove Short-lived, Copper Looks To China Data

Talking Points

• Gold may yet resume its upward trajectory on a weaker greenback
• Copper rallies for 6 straight sessions ahead of upcoming China data
• Crude oil bounces off key support at 105.00 amid continued uptrend

Gold and silver are giving back some ground in Early European trading after soaring by more than 3 and 4 percent respectively on Thursday. The precious metals could yet resume their ascent in the near-term if the US Dollar continues its recent slump. Meanwhile, copper is pushing higher ahead of Chinese PMI figures due on Monday, which are tipped to reveal a continued contraction in manufacturing activity.

Gold and Silver Soar

Possible explanations for gold’s push above the $1,300 handle during Thursday’s trading session are diverse. The simplest being the prospect of continued highly accommodative Fed policy, following the June FOMC rate decision earlier in the week. Yet, gold’s ascent was not accompanied by a commensurate drop in the greenback and US 10 year yields, suggesting other forces may be at play. DailyFX Chief Strategist John Kicklighter discusses the range of potential drivers behind gold’s run here.

Gold traders may recall the plunge the precious metal took in April of 2013. While explanations for the collapse were somewhat tenuous, the commodity continued to push lower. Similarly, the dramatic rally this week may afford the commodity extended gains as upside momentum builds. For those with a slightly longer memory; gold’s performance in the 1980s demonstrates a remarkable correlation to recent price action. After collapasing in 1980 and 1981 a dramatic spike higher in mid ’82 afforded a strong recovery over the remainder of the year (see chart below).

In the very short-term, given the magnitude of the rally, a corrective pullback would not be unusual as traders take profits after such a strong performance. However, from a fundamental perspective; the precious metal may yet resume its nascent upward trajectory if we see the slump for the US Dollar continue. This puts upcoming US data in focus, including next week’s revised GDP reading. If fresh economic figures from the world’s largest economy continue the string of recent disappointments, it could keep pressure on the greenback, and bolster gold prices.

Copper Gains Ahead of China PMI

Copper is set for its for its 6th straight day of gains with the base metal currently higher by 0.59 percent for the session. Speculation over further stimulus from Chinese monetary policy officials may help explain the growth sensitive commodity’s recovery in trading this week. This follows on from reports the PBOC was acting to lower the reserve requirement ratio for some of the nation’s banks, in order to help stimulate lending.

The China HSBC Flash PMI reading due on Monday will likely be in focus for copper traders, given the index provides a leading indicator of the state of the Chinese economy. While expected to remain in contractionary territory (49.7), economists are tipping a slight improvement from the prior reading of 49.4. A weaker-than-anticipated print could furnish fears of a further slowdown in economic growth, which would bode-ill for the country’s commodities appetite and would likely weigh on copper.

CRUDE OIL TECHNICAL ANALYSIS

WTI continues to pullback following signs of hesitation from traders denoted by a couple of Doji formations on the daily. The retreat to support at 105.00 is seen as an opportunity to enter new long positions given the uptrend remains intact (signaled by the Rate of Change indicator and 20 SMA). A potential target is offered by the recent highs at 107.60, while a daily close below 105.00 would negate a bullish technical bias.

Crude Oil: Pullback Offers New Long Entries

Daily Chart - Created Using FXCM Marketscope 2.0

GOLD TECHNICAL ANALYSIS

As noted in yesterday’s commodities report, gold was primed for a push higher given signs of an uptrend had emerged on the daily chart. A break above several resistance levels and spike in volatility suggests the potential for further gains. The slight pullback to support at 1,310 is seen as an opportunity for new long entries, with a target offered by the April high near 1,330.

The DailyFX Speculative Sentiment Index suggests a mixed bias for gold based on trader positioning.

Gold: Breakout Affords Bullish Bias

Daily Chart - Created Using FXCM Marketscope 2.0

SILVER TECHNICAL ANALYSIS

Silver’s ascent has stalled at the 61.8% Fib Retracement Level, which may prompt a slight retreat to support at 20.40. However, with the uptrend intact (signaled by the Rate of Change indicator and 20 SMA), a correction would be seen as an opportunity to enter new long positions. A daily close above 20.80 could open up a run on 21.66.

Silver: Sellers Emerge At Fib Level

Daily Chart - Created Using FXCM Marketscope 2.0

COPPER TECHNICAL ANALYSIS

Despite the recent recovery for copper, the downtrend for the base metal remains intact as suggested by the 20 SMA and Rate of Change indicator. A candlestick reversal pattern near resistance at 3.10 would be seen as an opportunity to enter short, with an initial target offered by support at 3.034.

Copper: Downtrend Intact Despite Recent Recovery

Daily Chart - Created Using FXCM Marketscope 2.0

PALLADIUM TECHNICAL ANALYSIS

Palladium’s break below the ascending trend channel on the daily has ended the commodity’s uptrend that had persisted since early February. While the precious metal has recovered some ground on the back of a Bullish Engulfing candlestick pattern, further gains may be limited given resistance looms nearby at 836.

Palladium: Recovery May Be Limited By Resistance Overhead

Daily Chart - Created Using FXCM Marketscope 2.0

PLATINUM TECHNICAL ANALYSIS

Platinum has bounced off the range-bottom at 1,424 following the formation of a Hammer candlestick, which may herald a push to resistance at 1,489.

Platinum: Eyes Range-Top Following Bullish Candlestick

Daily Chart - Created Using FXCM Marketscope 2.0

Written by David de Ferranti, Currency Analyst, DailyFX

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