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The path of least resistance today is down

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets were higher again overnight with gains generally around 1.4%. Economic news included a much stronger-than-expected Chinese services PMI reading for May, which suggests the epicenter of the coronavirus problem has seemingly traversed the brunt of the economic disaster. However, Chinese central bank leadership has indicated more stimulus is needed and will be applied! Other overnight economic data included Swiss GDP for the first quarter, which declined by 2.6% from the previous quarter, which was worse than expected. However, services and Composite PMI readings for May were stronger than expected in Spain, Italy, France and Germany and the overall Euro zone. The German unemployment rate in May came in worse than expected, registering 238,000 jobs lost versus expectations of 200,000. On the other hand, the number of jobs lost was smaller than the amount of unemployed in the previous month. Somewhat surprisingly, overall Euro zone unemployment rate readings came in much better-than-expected and only 0.2 above the previous month. The North American session will start out with a weekly private survey of mortgage applications, followed by the May ADP employment survey, which is forecast to have a sizable uptick from April's 20.236 million. The Markit US services PMI and Markit US composite PMI are expected to hold steady with their previous readings. The May ISM non-manufacturing index is forecast to have a modest uptick from April's 41.8 reading. April factory orders are expected to have a moderate decline from March's -10.3% reading. The Bank of Canada's latest monetary policy meeting is forecast to have no changes to rates or policy. Earnings announcements will include Campbell Soup before the Wall Street opening.


It would appear that another day of general “risk on" has resulted in further liquidation of gold and silver. However, the gold market is clearly exhibiting much more liquidation pressure than silver, perhaps because silver could see quicker physical demand recovery if a long pattern of risk-on equity gains is correctly signaling better global economic activity. Overnight it was noted that Japanese silver bullion imports so far this year have been on a stronger pace, with a private estimates calling for silver imports to be more than 10% above last year. Gold could draft some support from news that ETF holdings increased for the 28th straight day with an addition of 114,759 ounces, which in turn brings the year to date purchases closer to 18 million. Similarly but more significantly, silver ETFs added 4.18 million ounces, bringing this year's net purchases to 132.2 million. Depending on what data is included, every addition to silver ETF holdings is a new record holding tally. The current global silver ETF holdings are 739 million ounces, which is a 22% year to date change. Apparently gold and silver are not benefiting from the ongoing slide in the dollar which overnight reached its lowest level since March 12th. Clearly the bear camp has an edge to start today, but the potential for additional US violence, evidence of significant US jobs losses from ADP and fresh trade action from the US or China should keep some measure of safe haven buying interest anxiously waiting on the sidelines. A negative Indian jewelry demand forecast overnight suggested demand in that country might not recover until late in the 3rd quarter. However analysts think demand could see a minimal improvement in June. The gold charts are injured with little in the way of support until the late-May low above $1700. Fortunately for the silver bulls, July silver overnight returned to a past consolidation zone and found some support around the $18.00 level.


With both platinum and palladium giving ground yesterday and platinum obviously presenting negative charts, the bear has to be somewhat confident this morning. While ETF holdings have not been overly important to the PGM markets, it should be noted that both platinum and palladium saw fairly noted inflows yesterday. Chinese economic data overnight may help palladium respect consolidation support, but that support is a long way down at $1934.40. Unfortunately for the bulls, a South African court has ruled that lockdown laws are invalid, and that could speed mine re-starts. Another factor that could help palladium hold consolidation support is the projection that Chinese vehicle sales increased 11% over year ago levels in May. Hyundai reported overall US sales in May fell by 13%, but that was better than the 33% industry decline forecasted. Chinese vehicle demand readings are paramount to the palladium bull case going forward. While platinum has been the weaker market so far this week, it appears to have found credible chart support this morning at a previous consolidation low

MARKET IDEAS: We see more corrective action in gold and silver today, with silver potentially bottoming ahead of gold because of its potential to benefit from improvement in physical demand and from the realization that the global silver market might see the largest annual tightening in the last 10 years. With Chinese and Euro zone economic data improving, the risk-on bias might be able to remain in place through disappointing private US jobs data from ADP later this morning. If the data is negative but not worse than the previous month, it could allow for a full correction in August gold down to $1,702. Similar downside targeting in July silver under moderating global economic anxiety is $17.81.


The bulls retain control of good Chinese and European data

While the copper market is short-term overbought from a six-day rally of $0.14, the bull camp should clearly be emboldened by another round of better than expected Chinese economic data overnight. Copper should see additional lift from better than expected European services and composite PMI readings. LME copper stocks continue to fall, and the head of the Chinese central bank recently indicated that more economic stimulus was needed for the Chinese recovery. The Chinese central bank is apparently not satisfied with a slow recovery pattern. Certainly there are significant trade-related risks to Chinese demand and negative sentiment from US domestic issues, but it does not appear that copper will be deterred from returning to the late January through early March consolidation range bound by $2.50 and $2.63. While the spec position might have just shifted from net short to net long, we don't think the specs are out of buying fuel.

MARKET IDEAS: The bias is up, even if the market is becoming short-term technically overbought. However, as we have indicated a number of times over the past two months, we think the copper market is in a longer-term search for equilibrium pricing, and that equilibrium pricing is likely to be found between $2.50 and $2.63. Favorable Chinese services PMI readings overnight and stronger equity markets this morning could mean copper will skate through concerning US jobs news without significant corrective action.

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