Reversal in Oil and Rate Hike Odds Allows Gold a Partial Recovery From Yesterday’s Decline

Yesterday’s sharp decline in gold and silver was largely a response to the prospect of higher inflation for longer, and with it more rate hikes ahead. The catalyst was Trump’s rejection of Iran’s proposal to reopen the Strait of Hormuz within seven days, provided all of their demands were met. Those demands included the release of frozen assets, the removal of all sanctions, and the freedom to continue their nuclear ambitions. The net effect was to lift the odds of another 0.25% rate hike at the October FOMC meeting to 70.9%, the highest probability seen so far according to the FedWatch tool.

Today, Saudi Arabia announced that its East-West oil pipeline is back in operation after drone attacks forced a shutdown earlier this month. The pipeline is still under repair, however, and is currently running at only 50% of its capacity. Alongside this, reports have surfaced that oil is making its way through the Strait of Hormuz aboard undisclosed or undocumented vessels.

These supply side improvements were amplified by today’s announcement that the US will offer up to 40 million barrels of crude oil from the Strategic Petroleum Reserve, with the release scheduled for October 6th. In response, WTI crude oil futures fell 4.66%, dropping below $90 to trade at $88.97 at the time of writing.

Together, these developments reversed much of the rate hike pricing brought on by Trump’s rejection of Iran’s proposal. The FedWatch tool now shows a 50% chance of another hike at the next FOMC meeting, roughly 29 days away. That is about 20 points lower than yesterday and 5 points lower than a week ago.

The shift worked its way into the precious metals, allowing gold and silver to regain some of yesterday’s losses, though both remain far below their prices from the start of the week. Gold futures recovered about 40% of Monday’s drop, gaining $66.50 or 1.60% to close at $4,215. Silver futures had a slightly more modest recovery, regaining around 30% of Monday’s losses by advancing $0.81 or 1.34% to close at $61.84.

The technical picture did not improve much, and both metals remain firmly entrenched in bearish territory. Each is still situated below all of its major moving averages, below every support line in a daily Ichimoku cloud study, and below the clouds themselves, which in gold’s case have turned red in their forward projection. Gold did close back above the 78.6% Fibonacci retracement at $4,174 that we highlighted yesterday, but it remains well below the 61.8% retracement at $4,298.

Gold does have a chance to regain a bullish posture if it can recover from here and reclaim $4,300 as support. Until that occurs, however, it is our opinion that traders should await real confirmation that gold has flipped bullish. A break below the July lows would confirm that the August rally was merely a false breakout within a downtrend that has been in place since gold hit its all-time highs at the beginning of the year.

Wishing you, as always, good trading,