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Risk-on pattern leaves precious metals in a downward motion

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Overnight global equity markets were mixed, with Shanghai markets, Australia and the Hang Seng marginally lower while the rest of the world posted gains of roughly 1%. Overnight economic data included a French business climate manufacturing index for May which failed to rebound as much as was expected. However, French consumer confidence for May was stronger than expected, but the reading was below the previous month. From Switzerland, a ZEW expectations survey for May jumped significantly over the April level. The North American session will start out with weekly private surveys of same-store sales and mortgage applications. April Canadian building permits are expected to have a modest uptick from March's -13.2% reading. The Richmond Fed's May manufacturing index is forecast to have a sizable uptick from April's -53 reading. The Fed will release their latest Beige Book during afternoon US trading hours. St. Louis Fed President Bullard will speak during early afternoon US trading hours. Earnings announcements will include HP, Autodesk, Workday and NetApp after the Wall Street close.

With fresh and significant chart damage early this morning combined with a definitive extension of risk-on from Monday, the path of least resistance in gold and silver is pointing downward. While the market has not focused recently on the supply side of the equation, the trade was presented with news overnight that Russian 2019 gold production rose by 9.3% over 2018, and that bearish news was accentuated by the fact that China was a net exporter of gold through Hong Kong last month. Earlier in the week South African gold production was predicted to decline 8% to 10% because of virus-related shutdowns. But the bull camp has to be under pressure after two days of noted in the wake of predictions that the US and China are headed toward a "Cold War," as that suggests safe haven buying is not easily stirred into action. The bull camp also has to be discouraged by a UK court ruling that Venezuela should regain its gold seized because of sanctions, as many fear that gold will be sold quickly into the world market to meet the Venezuelan government’s cash needs. Venezuelan gold reserves in England are reportedly $1 billion, the equivalent of 588,000 ounces. Yet another minor pressure on gold is the fact that yields in equity investments are improving by the day at the same time that US Treasury yields have crept within striking distance of being the highest in two months. The spec and fund met long in gold was somewhat burdensome early last week, so some of the action in gold is likely stop loss selling. The large range down failure yesterday was done on heavy volume, which suggests the bear camp has the potential to push prices even lower directly ahead. Logical downside targeting in June gold is a recent double low down at $1,690.10. Despite the significant washout yesterday, gold ETF holdings rose for the 23rd straight session, with net purchases on the year approaching 17 million ounces. Silver ETFs reduced their holdings by 58,371 ounces yesterday and that metal seems to be locked into sync with gold and clearly is not benefiting from economic optimism this week. However the silver charts are not as bearish as gold, with consolidation low support building around $17.26.

The palladium market is diverging with the rest of the precious metals markets this morning, perhaps because of optimism from the spooling-up of global auto production. Certainly the palladium market is drafting some support from strength in equities, but the chart still looks vulnerable to a fresh lower low for the move. While the market might garner some support from talk of China's large infrastructure programs and the potential for lower interest rates, the threat of headwinds against the Chinese economy because of Hong Kong tensions tempers a portion of hope for improving demand from China. Fortunately for the bull camp, the latest COT positioning report showed only a minimal spec net long, and given the slide in prices since the report, it is possible the net long has been fully liquidated. A critical pivot point/failure point in June Palladium is seen at $1,945, with the next downside targeting seen at $1,914.50. While the platinum market showed corrective action on Tuesday and damaged its charts further again this morning, we continue to see it as the best long opportunity among the PGMs, especially if global economic views are boosted further by vaccine news. Unfortunately for the bull camp, the spec and fund net long is significantly larger than it is for palladium. Therefore the market could have difficulty finding a fresh wave of buyers. In the near term platinum looks to track gold prices instead of equities, and that should mean the market has extremely important support today down at $851.30.

TODAY'S MARKET IDEAS: The path of least resistance in the precious metals complex is pointing down again this morning, despite overt weakness in the dollar. We see gold vulnerable to a return to a recent double low down at $1,690.20 and a possible further slide down to the May low of $1,676 in the event that equities extend their early gains. In silver, we see a couple of critical pivot point support levels today, one at $17.26 and another down at $17.19.

The bias is up but the bulls are unnerved by Hong Kong Police

While copper prices spent the overnight trade in negative territory, the market continues to respect a 2 1/2 month uptrend channel support line and should draft support from gains in global equity markets. However, police have fired pepper spray on protesters in Hong Kong, and the headlines are rife with predictions of a US/China "Cold War," and that certainly questions future Chinese demand. On the other hand, the market is expecting China to move very aggressively on infrastructure activity to stimulate domestic demand inside the country, LME copper stocks declined by a notable 5,550 tons overnight, and Poland recorded a 6.5% drop in April copper production relative to a year ago. There appear to be a number of bullish themes operating in the marketplace, with the latest COT positioning report showing specs and funds were still holding a net short as of last Tuesday, which suggests to us that speculative buying capacity remains in place.

MARKET IDEAS: While the path of least resistance is pointing upward, the bull camp should be a little concerned about the unfolding events in Hong Kong, as that could call current Chinese recovery forecasts into question, especially if the US implements sanctions against China. Nonetheless uptrend channel support in July copper is seen at $2.3825 today, with the top of the uptrend channel seen at $2.4790.

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