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The bulls retain control, of surging infections and stimulus promises

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets overnight were mixed, with slightly more markets trading higher than trading lower. Gains overnight were the highest in the CSI 300 at just over 2% with the decline of 2.1% in Russia the largest slide. Overnight economic information kicked off with Japanese large manufacturing (Tankan) figures for the 2nd quarter, with the headline reading posting a -27 reading versus expectations of -24. The manufacturing weakness in Japan was partially offset by a private bank manufacturing PMI reading for June, which beat expectations and improved on the prior month. Japanese consumer confidence readings in June rebounded significantly, thereby countervailing some of the negative manufacturing news. Australian building permits declined by 16.4% on a month over month basis in May, while the Caixin manufacturing PMI in China for June came in above expectations and above the prior month. German retail sales for May jumped by 13.9%, 10% above expected. Swiss purchasing managers for June came in below expectations and below the prior month. Perhaps the most important economic report overnight came from Germany with its unemployment rate of 6.4%, better than expected and the reading an uptick from the prior month. It should also be noted that Germany added 69,000 unemployed in June. It should also be noted that German and European manufacturing PMI readings for June both bested expectations and improved over the previous month. The North American session will start out with a weekly private survey of mortgage applications and the June Challenger job cuts survey. The June ADP employment survey is forecast to have a sizable uptick from May's 2.76 million decline. The June Markit US manufacturing MPI is expected to hold steady with the previous 49.6 reading. The June ISM manufacturing index is forecast to have a sizable uptick from May's 43.1 reading. May construction spending is expected to have a moderate uptick from April's -2.9% reading. The meeting minutes from the latest FOMC monetary policy meeting will be released during afternoon US trading hours. Earnings announcements will include General Mills and Constellation Brands before the Wall Street opening.

GOLD / SILVER

Against the backdrop of another record daily infection rate in the US, promises of more support from the US government and from the US Federal Reserve, gold prices have begun the process of settling in above the $1800 level. With the gold market also reaching the highest level since 2011 and given the stellar quarterly gain in gold prices, we suspect gold has found a strong position in the "hot markets" category for investors. On Tuesday gold ETFs saw net purchases of 109,776 ounces, putting their year to date purchases above 20 million. Not to be left out, silver ETFs added a significant 8.53 million ounces yesterday (the biggest one day inflow since May 22nd), bringing this year's net purchases to 175.4 million ounces. Obviously a continuation of investment inflow to gold and silver ETFs has already become a very material force in supply and demand tables, with those funds likely to be longer-term positions than those in gold and silver futures. Seeing the World Health Organization indicate the worst is still ahead and the Federal Reserve Chairman continuing to suggest the US economy is at huge risk keeps the psychological condition bullish for precious metals, but to shift gold and silver into overdrive, it might require an infrastructure spending program from the US and a series of global central bank actions. The US Federal Reserve Chairman yesterday called on other branches of the government to do whatever they could now to assist the economy as the US enters yet another critical stage in the virus war. IMF gold data for the month of May showed several countries reducing their holdings, but a jump in Turkish gold holdings resulted in total global central bank holdings increased from April to May. Upcoming US data (there will be an avalanche of data in the coming two sessions before the holiday on Friday), especially jobs-related data, could either spark broad economic uncertainty or reduce anxiety from the infection flare. We leave the path of least resistance pointing upward in gold, but would have preferred to have seen trading volume expand over the last three trading sessions instead of narrow. An awakening of sorts took place in the silver market as it broke out above the June consolidation this week and prompted some technical analysts to project a trade above $19.00 in the coming session. In the days ahead the bull camp in silver will likely need consistent strength in gold to prevent prices from faltering in the wake of any disappointing economic news, but the market is starting to build its own bull case with noted inflows to ETFs and very bullish chart action. Silver now has a target of $20.00 calculated from the width of the late May through June consolidation pattern.

PGM

Palladium and platinum have garnered lift from strength in gold and silver for a change. Both markets charts shifted bullish yesterday, with palladium forging a 14 day high. Obviously the palladium market drafted support from positive Chinese PMI readings, as that helps to improve the outlook for Chinese auto sales and therefore improves demand for global auto catalyst feedstocks like palladium. However, the bull camp hasn't extended its edge definitively this morning. The latest data also pointed out a jump in overall Chinese exports, which suggests their foreign demand-driven economy is seeing further signs of recovery. With a 40 day downtrend channel resistance line in palladium taken out on the upside yesterday at $1,938.20, the next upside target is seen at $2,056.50. Not surprisingly, the platinum market forged less stellar gains than palladium, likely the result of Chinese vehicle growth focused on gasoline engines instead of diesel, which platinum in their auto catalyst devices. Nonetheless, ongoing gains in gold, silver and palladium could drag platinum higher with initial resistance today seen at $860.80.

MARKET IDEAS: The path of least resistance is pointing up in the precious metals markets with the infection spread in the US not showing any sign of slowing, the dollar showing a key reversal down yesterday, and a series of US officials again promising very aggressive fiscal and monetary support for the US economy. While not a perfect bullish storm, seeing the combination of safe haven buying, some inflationary buying, and currency related buying is an impressive argument for more gains. Uptrend channel support in August gold today is raised to $1,775.50, with an intermediate upside target of $1,900, which was derived using the width of the April through June trading range as a measuring tool. The September silver market also looks to have follow-through potential, with the next key resistance point seen at a past double high up around $19.02. Ultimately we see a $20.00 target in September silver.

COPPER COMMENTARY

Favor Chinese copper demand hopes offset US infection surge

The copper market made yet another higher high for the move overnight, and many technical analysts are projecting a move back to the $2.80 level. Clearly the heart of the bull case this morning is another better than expected Chinese PMI data point overnight, with the kicker being from growing speculation that China will lower interest rates again. The China PMI data earlier this week showed evidence that total exports were improving, suggesting that China’s recovery could pick up. Not surprisingly LME copper warehouse stocks declined again overnight, and that news combined with a 5 1/2 month high in Shanghai copper prices gives the bull camp plenty of ammunition. Other issues adding into the upward track is the extension of the US PPP program and fear of production losses in Chile and the Congo.

MARKET IDEAS: There is no need to take control away from the bull camp in copper as long as world economic sentiment is not seriously tripped up by the US infection problem. Therefore equity market action is likely to have a big impact on copper prices, with copper prices at times taking some direction from US jobs related data. Uptrend channel support today in September copper is $2.7210 with the next key resistance point seen at $2.7520.

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