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Gold charts turn more bullish economic & uncertainty is returning

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets overnight showed divergent action, with Russian and Australian markets higher and the rest of the world’s markets trading more than 1.5% lower. Economic developments included a decision by the Royal Bank of New Zealand to hold rates steady, a softer than expected Japanese Coincident Index for April, better-than-expected Japanese Leading Economic Index results for April and a disappointing French business climate in manufacturing reading for June. The markets were also presented with a better than expected German IFO business climate and expectations readings for June and a ZEW survey of Swiss expectations for the month of June that jumped to 48.7 from 31.3 previously. The North American session will start out with a weekly reading on mortgage applications, followed by the April FHFA home price index, which is forecast to have a modest uptick from March's 0.1% reading. Chicago Fed President Evans and St. Louis Fed President Bullard will speak during afternoon US trading hours.

The gold market has followed through with an upside breakout and is approaching levels not seen for eight years. The market seems to be catching inflows from a number of different themes this morning, with weakness in equities providing fresh buying interest. Obviously the emerging number-one story for gold is the escalation of infections in 12 different US states, with some markets attempting to factor in a growing potential for a lockdown in the troubled areas. Gold prices in India also continued to rise overnight, despite suggestions that demand was soft because of the troubled economy and weak currency. However, gold ETFs added 114,527 ounces to their holdings yesterday, bringing net purchases on the year up to 19.2 million ounces. Seeing the US began to discuss details on yet another $1 trillion stimulus package adds to the allure of hard assets like gold, especially after one member of Congress admitted that there has been some monetization of US debt. The President's Chief Economic Advisor indicated that the Administration would be on board with direct checks to citizens and/or bonus payments for those who return to work. However, it was also projected that the next stimulus package might not be finished until August! Yet another driving force for the bull camp is the strengthening chart pattern in gold, with prices this morning forging a definitive upside breakout that has given the metal front-page status in the financial markets. Using classic technical measuring tools from the 3-month consolidation zone establishes a target of $1,900 if the 2020 highs are taken out on a closing basis. Silver charts are decidedly less impressive than gold, with the new high for the move overnight leaving prices well below the highs seen only three weeks ago and them significantly below this year's highs. Furthermore, silver ETFs liquidated 523,015 ounces of holdings yesterday, lowering the net purchases this year to 253.7 million ounces. While we expect silver to be dragged higher by gold, it is clear that economic anxiety is keeping industrial silver demand hopes suspect.

While September palladium spent the majority of Tuesday in the upper quadrant of the Monday range and it has broken out to the upside this morning, the fundamentals are mixed to mostly negative. China's version of their quarterly Beige Book showed their economy contracted, and the US infection situation is likely to result in lockdown talk very soon. Yet another potential undermining force for palladium came from Boston Fed President Rosengren's comments regarding his concern about the recovery because of "unsafe re-openings." While not a major impact on palladium, Chinese markets will enter the Dragon Boat Festival and that could limit positive demand news flow from Asia in the coming sessions. Downtrend channel resistance in September palladium today squeezes down on top of yesterday's trade at $1,969.80, and a failure to hold above $1,876.50 could target a swift move down to $1,740. While the platinum market has displayed better chart action than platinum over the past three trading sessions, it remains within a 40 day downtrend pattern and doesn't appear to be getting much lift from positive gold action or demand-oriented headlines. However, given the convergence of prices over the past 40 days, traders might utilize a breakout system with a buy signal generated from a trade above $850 and a sell signal with a trade below $821.

MARKET IDEAS: It is extremely difficult to take control away from the bull camp in the gold market, as the trade appears to be capable of spinning bearish headlines to suit the bullish argument. Obviously bullish chart action, recent declines in the dollar, talk of another large US stimulus package, and expanding uncertainty from US infection counts offer a number of bullish themes. In short, it appears that gold is poised for a consistent trade above $1,800 with measuring tools from the April through June consolidation pattern targeting a follow-through rally to $1,900. Silver seems to be lacking the upside sensitivity that gold is displaying, and we suspect that fear of infections getting out of control again have thickened overhead resistance at $18.19 with additional resistance seen at a quasi-double high up at $18.40.


Corrective track as economic fear rise off US infections

The copper market is showing some corrective action this morning, as the global economic outlook is being called into question. However both LME and Shanghai copper stocks (Shanghai stocks were released early due to the Dragon Boat Festival) both notched notable declines overnight, and therefore supply news this morning is offsetting a portion of the negative demand news. It should also be noted that Shanghai Exchange stocks have declined for six straight weeks, with this week's decline being 9.1%! In the last 120 trading sessions, LME copper stocks have seen only 16 daily inflows against 104 daily outflows. While some German economic readings overnight provided some positive views from the economic front, we suspect non-Chinese demand will be questioned over the coming sessions. The latest on the US/China trade talk front pointed to better relations on Tuesday, but the copper trade will continue to watch that situation closely as the talks have not tracked in a straight line. The trade should be cushioned by yesterday's sweep of positive global PMI data, favorable US housing figures, and talk of another $1 trillion US stimulus package.

MARKET IDEAS: While it is difficult to take control away from the bull camp (with the past six trading sessions presenting uniformly higher highs and higher lows), the economic outlook this morning has deteriorated, and a measure of long profit taking is expected. But unless US equities dive sharply (by more than 2%), copper might be able to respect close-in support at $2.5950. Uptrend channel support today in July copper is seen down at $2.5850.

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