Commodities surge as sentiment lifts

2012-FEB-22

Gold and silver prices as well as equities and industrial commodities had another strong day yesterday, as traders dashed back into “risk” positions. In America the Dow Jones Industrial Average hit an intraday high of 13,004.97 – its highest level since May 2008. Comex March gold futures settled at $1,757.20/oz, for a gain of 1.85%. As per usual in “risk on” days, silver outperformed gold, with front month futures gaining over 3.5% to settle at $34.43, with copper also recording gains of 3.5%, settling at $3.83 a pound at the Comex. Likewise, crude oil had another strong session, with WTI up 2.5% at over $105 a barrel, and Brent crude now trading north of $121 a barrel.

As discussed by Trader Dan Norcini at the King World News Blog, we could be on the cusp of a major breakout in crude oil prices judging from technical patterns on the oil price charts. This will be very supportive for precious metals, though has serious consequences for the world’s – and particularly American – consumers, with record-petrol prices an increasing possibility in the months ahead.

Gold and silver have both bested the resistance levels that had been containing them for the last few weeks ($1,750 for gold; $34 for silver). Silver will face more selling pressure at $35. If it can manage consecutive settlements above that level, then technical analyst Eric De Groot has identified $37.50/oz as a key level at the London PM fix. If silver breaches this level, we could be heading back towards the old nominal $50 record very quickly.

Bearish voices are warning that the current rally in everything seemingly but the US dollar is unsustainable, and that such cross-asset correlation is usually a sign that a meaningful correction is imminent. However, there are good grounds for thinking that this pessimism may be misplaced. For starters, as can be seen from these charts handily provided by James Bianco, the last year has seen a surge in central bank money printing, something that will lend strong support to equities and commodities.

Couple this with the fact that the eurozone situation has been stabilised and that the European Central Bank will announce another massive package of bank loans at the end of this month – which some have predicted could be worth as much as one trillion euros – and it’s hard to see why exactly, barring some kind of “black swan” event, the markets should be about to reverse course. After all, the markets love free money.