When trading commodities, the outlook is dependent upon the type of asset. The precious metals sit at the safer haven end of the scale with traders focused on the outlook for US interest rates. For more growth-oriented commodity plays such as energy (oil) and industrial metals (copper), markets are moving on the spread of the delta variant of COVID. 

  • Volatility on gold and silver is elevating around key data and FOMC member comments
  • As delta variant concerns grow in China, we are seeing oil and copper come under pressure.
  • Technicals show gold and silver still stuck, as oil and copper look under corrective threat

Precious metals react to data and Fed speak

Anything that affects the outlook for the Federal Reserve’s monetary policy is having an impact on precious metals. 

Yesterday we saw a disappointing ADP number which question’s how strong Friday’s Non-farm Payrolls might be. The Federal Reserve is certainly mindful of the need for continued improvement in the labor market before beginning to tighten monetary policy (which will first be through tapering the $120bn per month asset purchases). 

Gold continues to have an ongoing strong negative divergence with both US bond yields and the US dollar. With yields tracking lower this should continue to help support gold. There is a question mark around the US dollar outlook though. If risk aversion takes hold then the dollar could hold up. 

Gold/Dollar Index

Furthermore, that dollar got a boost late yesterday in the wake of arguably hawkish comments from vice Fed-chair Richard Clarida (who as a centrist on the committee is seen as a good gauge for policy). Clarida said, “the necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022”. Cue a dollar rally and gold and silver lower. However, as the dust settles, this is not a great deal more than the market already felt from the Fed’s June dot plots (two hikes in 2023 and getting closer to a hike in 2022).

So, we have learned that the closer we get to the Fed taper, the more markets will move on economic data that either confirms or denies the taper. Essentially it is all noise though, good for increased volatility.

Fears over delta variant in China impact on growth driven commodities

The delta variant is a growing concern in China in recent days. Over 500 cases may not sound like much, but there are confirmed cases in 15 provinces now and the authorities are acting fast to try and get a handle on the highly contagious COVID variant which is the country’s largest breakout in months. 

Travel restrictions are in place, whilst lockdowns are being imposed in several cities with restrictions also in the capital Beijing. This will have broader economic consequences.

The impact is certainly being seen through commodities such as the oil price (which is impacted by travel demand) and base metals much as copper. 

There are small signs that volatility in options trading on oil is picking up once more in recent days too. This could certainly have an impact on the oil price.

Crude Oil volatility index

Technical analysis of commodities

Looking at the technical analysis of the major commodities, we see some key themes developing:

  • Gold and Silver are trying to break through resistance, but are stuck for now on the mixed signals of FOMC policy.
  • Oil has retreated sharply back into an area of support that will be under threat if Chinese social restrictions extend
  • Copper is also threatening further corrective downside 

Gold (MT5 code: XAUUSD) has once more retreated from resistance at $1834. The RSI is stuck between 40/60 and a ranging phase continues between $1790/$1834. 

Gold technical analysis

Silver (MT5 code: XAGUSD) has spent the past week trading around resistance at $25.80 and looked to be breaking higher yesterday on the ADP disappointment. However, the bulls have again be held back. Momentum remains stuck with RSI under 50 and the recovery is back on ice once more. Support at $25.25 now needs to be watched.

Silver technical analysis

Brent Crude oil (MT5 code: UKOUSD) has been flying around in the past month. The latest swing lower is holding support at $70.30 for now. However, a loss of $70 would certainly pressure the big uptrend and the key reaction low at $67.65 comes back into play.

Crude oil technical analysis

Copper (MT5 code: Copper) has been correcting back for the past week or so. A move back under the falling 55 day moving average (currently $4.38) is a concern and momentum is with a further slide lower. There is a key band of support $4.08/$4.19 which is looking increasingly likely now.

Copper technical analysis