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What Inflation? Liquidation continues as global economic data disappoints

FXstreet.com (Barcelona) - Many commodities traders are still in shock after the recent volatility in the metals sector over the last few sessions. Let’s put this in perspective, over the past two days gold has lost 13.33%, and silver is down 17.84%. Platinum, palladium, and copper have also been under serious pressure. The wide trading ranges and excessive volatility has futures exchanges getting involved to help reinforce confidence for investors.

In an article published earlier on FXStreet.com, citing Dow Jones newswire: "CME Group Inc. said it will raise the collateral requirements for trading in benchmark gold, silver and other precious metals futures contracts, effective at the close of business Tuesday. Margins to trade benchmark Comex 100-troy ounce gold futures will be increased by 19%, CME said in a notice emailed late Monday. The margin to trade silver will increase 18%, palladium will increase 14% and platinum will increase 19%. Natural-gas futures will increase 5.6%.” The CME has proceeded with similar to actions in the past when excessive volatility in commodities is present.

In an environment where central banks around the world continue to provide global liquidity, the commodities markets seem to be sending a far different message as to the risks of inflation.

“Tomorrow's U.S. consumer price report should show how benign inflation pressures have been in the U.S. as CPI is expected to be have stagnated in the month of March. U.K. and Eurozone consumer price reports are also scheduled for release and while price pressures have been stronger in both countries, there is still more downside than upside risks. As a result, with returns in equities becoming more attractive, a larger subset of investors are giving up on their losing inflation hedge and going on the hunt for yield,” noted Kathy Lien, co-founder at BK Asset Management.

Due to the fundamental correlation between commodities and economic growth, Lien is not surprised at the recent weakness in the commodities complex . She went on to say, “The sell-off in gold also reflects concerns about global growth. Between this morning's softer U.S. economic reports, last night's weaker Chinese data and this month's disappointing U.S. retail sales and jobs numbers, there are definite signs that the global recovery is losing momentum.”

Some analysts think the gold selling is overdone and should stabilize in coming sessions. According to Sean Lee of FXWW, The big shock in the Gold market is probably close to being over, and I’d expect to see Central Bank bids returning before too long.

It should be noted the precious metals are not the only commodities sector to see significant selling. In fact, until the past few days the energy sector had been leading the commodities complex lower. For reference, since mid February RBOB Gasoline is down 17.7% and Heating Oil is down 16.16%, Crude Oil WTI has given up 10.3% in April. The lone standout has been Natural Gas, which is up an impressive 27% over the last 8 weeks.

From a technical perspective, it’s hard to argue that the majority of metals/energy complex are not oversold in the shorter term. Momentum readings RSI (14) are well into the low teens on most of the daily charts which should help bring in some short covering from many looking to book profits from the last few days.

However, taking a look at the longer term charts, significant damage looks to have been done on the weekly and monthly time frames, which often predicates a “sell the rally” vs. “buy the dip” mentality. In the short term, I would not be surprised to see some type of counter trend or “bear flag” rally develop on both gold and silver. Expect firm resistance on near the 1410-1420 level in gold (supply candles on 60min chart), and 23.20-23.50 in silver (supply candles on 60min chart). The longer term patterns completed on the weekly charts have much lower price targets.

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