Commodities outlook: Unconvinced by gold, oil tests support

Gold confuses market watchers, while oil is friendless. Our financial markets analyst shares his view.

Overnight, the rate of change in reported coronavirus cases and deaths increased in the main area in China (Hubei) where the breakout occurred. Equity indices and risk assets sold off while the like of gold, the Japanese yen and bonds saw demand increase. 

The number of reported cases in Hubei province has jumped by 14,840 and fatalities by 242. Meanwhile, there was another confirmed case in London and the ship off the coast of Japan recorded another 44 infected people. 

The main thing to keep an eye on here is the rate of change. Some journalists who are against the Chinese communist regime say that the death toll is much higher than what is being reported by Chinese media. They believe the government is controlling reporting to avoid a mass exodus of investment.

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Looking at gold, and this recent move higher remains unconvincing, although, over the longer term, the chart does still look bullish. The reason for scepticism is the fact that volume has not spiked in line with the rise in price.

Normally, if the market is backing a move higher, the volume rises with the price but, in this instance, they seem to be diverging. The key for confirmation will be the start of trade on COMEX. Over the next few trading sessions, watch the influx into gold-based EFT's, gold futures and the volume away from equities to confirm any potential chart breakout to the upside. 

Source: TradingView Past performance is not a guide to future performance

On the flip side of the risk-off trade we have oil. West Texas Intermediate (WTI) future prices have seen a strong sell-off in recent weeks, but the price recovered at the start of this week only to be battered down again today. 

Oil traders in the futures markets tend to be more dramatic, and the chart below reflects this. The volume increased sharply during the sell-off, but it is the buying support price received once $50 per barrel was tested that is really important.

Although the key support level on the chart was breached, the price moved back higher again, and now this recent spate of negative news could mean the level may be tested once again. 

Support and resistance levels are there to be broken, but the important thing to remember is when they are, you just need a good fundamental reason and the volume to back the break.

Source: TradingView Past performance is not a guide to future performance

Rajan Dhall is a freelance contributor and not a direct employee of interactive investor.