MCX CRUDE LIVE CHART

Charts suggest decline in crude oil may be overIn our previous essay, we examined the situation in crude oil in different time horizons. Back then, we wrote that the short-term situation had improved as crude oil had broken above both short-term resistance lines on relatively high volume and had come back above the previously-broken medium-term support line and the long-term one.

In the following days, crude oil extended gains and approached its 200-day moving average. What’s next? Is the worst already behind oil bulls and we will see further improvement? Before we try to answer these questions, we’ll examine three interesting ratios to see if there’s anything on the horizon that could drive crude oil higher or lower in the near future. Let’s start with the oil-to-oil-stocks ratio (charts courtesy by http://stockcharts.com).

At the end of October, the ratio declined and broke below the long-term declining support line created by the 2012 and 2013 lows. Additionally, the WTIC:XOI ratio verified the breakdown, which was a strong bearish signal. In our previous Oil Investment Update we wrote that as long as the breakdown below the bold blue support line was not invalidated, another downswing couldn’t be ruled out.

Looking at the above chart, we see that the ratio reached the next long-term support line (marked with the thin blue line on the previous chart) and rebounded sharply in the previous week. In this way, the ratio invalidated the breakdown below the support line based on the 2012 and 2013 lows, which is a strong bullish sign.

Last week, the ratio reached its 50-day moving average and reversed the course – similarly to what we saw in April, May and June. However, we should keep in mind that back then, new lows in ratio didn’t trigger a fresh low in crude oil. Therefore, if history repeats itself once again, we may see lower values of light crude in near future, but another big move lower doesn’t seem likely.

The Case For A December Taper Just Got A Whole Lot Stronger

"After a week of surprisingly good economic data and the likelihood of another government shutdown approaching zero, the Federal Reserve will likely taper in December if it sticks to the plan it laid out over the summer," concluded Business Insider's Danny Vinik on November 11.
At the time of Vinik's analysis, most of Wall Street's economists were unwilling to forecast a December tapering of the Fed's $85 monthly quantitative easing program.

But that sentiment has shifted in the wake of the surprisingly strong November jobs report, the surprisingly strong November retail sales report, and the earlier-than-expected U.S. budget deal.

"It's still a close call, but chances are now above 50 percent that the Federal Reserve will modestly reduce its asset purchases later this month," said Potomac Research Group's Greg Valliere who was communicating the analysis of former Fed Vice Chair Don Kohn. "There's a 60-40 chance that the FOMC will decide on Dec. 18 to begin tapering."

"The final piece of the puzzle may have been yesterday's solid retail sales data, a sign that the recent improvement in the labor market may finally be producing stronger spending," he added. "Agreement on a budget deal, eliminating a major source of uncertainty, is another factor supporting a December taper."

But could the markets handle it?

"I think a few weeks ago investors would have been pretty concerned about the idea of [a December] taper because the data didn't really give them comfort that the economy was at escape velocity," said JP Morgan's Tom Lee. But "with Friday's jobs report and some of the other ones we've had recently, you know I think investors are getting comfortable if it does happen in December."

The Federal Reserve will conclude its next Federal Open Market Committee (FOMC) meeting and publish its statement at 2:00 p.m. ET on Wednesday, December 18. The consensus among Wall Street's economists is no taper.

Factors affecting gold beyond December FOMC meeting

Stronger U.S. Sentiments

On Thursday, the U.S. House approved a bipartisan federal budget plan to avert a government shutdown in the next two years. The plan did not touch the entitlement spending or corporate taxes. The U.S. debt ceiling was not raised either, with a likely showdown between the parties in February. The removal of this uncertainty has lessened the appeal of gold as a safe haven. The U.S. retail sales rose by a stronger-than-expected 0.7% in November compared to a 0.6% rise in October. Stronger personal spending, expected to be 3.5% annualized, may help to lift the GDP growth in Q4. These stronger data have more than offset the weaker report shown by a jump in the latest weekly jobless claims to a two-month high of 368,000. The gold market is increasingly factoring in the possibility of a Fed tapering next week.

Near and Longer-term Factors for Gold

Lack of near-term positive gold price catalysts and the recovery in the stock markets have prompted holders of the SPDR Gold Trust to liquidate their holdings, which have fallen 39% this year to 827.6 metric tons. Expected near-term Fed tapering and the retrenchment of the largest gold consumer, India, due to its government's import curbs are the two big factors hurting gold prices this year. In the longer-run, the reduction in QE, which is expected to be gradual, and the very low real interest rate, are positive factors for gold. A 50-year chart of the gold price versus the S&P 500 Index shows that the current ratio of 0.7 is way below the long-term average of 1.13.

What to Watch

All eyes will be on the FOMC meeting on Dec. 17-18. We will also monitor the December flash PMI for China, E17, and the U.S. on Dec. 16, the November U.S. CPI on Dec. 17, the U.S. FOMC decision, the November U.S. housing starts, and the December Germany IFO business climate on Dec. 18 as well as the November U.S. existing home sales on Dec. 19. 

Factors affecting gold beyond December FOMC meeting

What If the Fed Does Taper QE? 8 Possible Scenarios
In previous articles and market overview reports, my firm discussed the unique macroeconomic position of gold (gold is a system hedge). The main conclusion was that gold is something else than its highly touted reputation as an inflation hedge. This realization is crucial for any gold investment decisions. Actually, when it comes to gold and the case for it or against it, there are many conflicting arguments. On one hand, we hear stories about the threat of inflation and a sharp rise of overall prices, therefore we're told that one should invest in this shiny asset. We also hear about credit deflation, banks in trouble, and financial markets that are not in great shape, making gold a good alternative. Having been fed all kinds of information, one can have trouble inferring what to do in various scenarios.
 
As always, there are many ways in which the situation can develop, and in today’s article we will focus on what's probably the most important factor that will, to a great extent, determine what will happen in the coming months -- not just in the precious metals market, but also in bonds, stocks, and real estate markets.
 
Yes, you guessed correctly -- we are going to discuss the Fed’s possible actions and the likely way this could affect the markets. Will we actually see any form of tapering or will we just hear about it? If so how will remarks made by the Fed impact actual events? As you know, very often what Ben Bernanke or some other Fed official says can ignite large price moves. So, for the analysis to be complete, we should focus not only on what happens, but also on how it is announced.
 
In the following part of this article we will discuss what’s likely to happen if the Fed does indeed taper the QE program.

Based on the possible combinations, we created eight scenarios, and we will discuss how each of the markets (gold, stocks, bonds, real estate) could perform in each of them. We also explain which are the most and least likely. If they play out in the future you will already know what to expect in the following weeks/months.
 
The involvement of the Fed in buying assets makes it the most important player in the financial market. Over $3.5 trillion amounts to 23% of the American GDP (compare that to “savings,” which are almost two times less than that). There are “rumors” about the Federal Reserve System’s possible stepping back from its policy of quantitative easing. The rumors came from Bernanke’s speech, and were slightly present in Fed’s minutes from July 30-31 (the minutes were published on the August 21. They register discussions that take place during Federal Open Market Committee meetings).
 
The so-called tapering of the Fed would mean a significant slowdown of the programs (which lead to an increase in the assets holdings). Many observers argued that tapering is supposed to start before the end of 2013, September being the likely candidate. The minutes do not confirm this, at least not strongly. We can read that "almost all Committee members agreed that a change in the purchase program was not yet appropriate." There was only one mildly dissenting voice about some improvement in the labor market as a reason for the Committee to offer an explicit statement about asset purchase reduction in the "near future." A few members responded that patience is needed in order to carefully evaluate the economic data. A few others responded that the plan was already articulated (although not very strongly), and that the programs will be reduced.
 
In conclusion the Fed decided to keep the programs floating: They buy $40 billion of mortgage backed securities and $45 billion of Treasuries each month in order to bid the prices of both (and keep the returns low). Moreover, the interest rate is supposed to stay at the current low level of 0.25% as long as the unemployment rate stays below 6.5%, and the official inflation rate is not half a percentage point higher than the main policy goal of 2%. 

XAUUSD SIGNALS

Weekly Forecast, 09 - 13 December

Main scenario:
The pair is trading along an sideways trend.
The downtrend may be expected to continue in case the market drops below support level 1236, which will be followed by reaching support level 1200.

Alternative scenario:
An uptrend will start as soon, as the pair rises above resistance level 1251, which will be followed by moving up to resistance level 1270 and then to 1289. And if it keeps on moving up above that level, we may expect the pair to reach resistance level 1330.

S/R levels:
Supports: 1236 (main), 1221 (strong), 1200
Resistances: 1251 (main), 1270 (strong), 1289 (main), 1330 (strong)

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Main scenario:
The pair is trading along an sideways trend.
An uptrend will start as soon, as the pair rises above resistance level 1236, which will be followed by moving up to resistance level 1251.

Alternative scenario:
An downtrend will start as soon, as the pair drops below support level 1218, which will be followed by moving down to support level 1208 and then to 1200.

S/R levels:
Supports: 1223 (strong), 1218 (main), 1208, 1200
Resistances: 1236 (strong), 1243, 1251

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