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Upside momentum should prompt upside follow through

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets were evenly divided overnight with gains primarily centered in Asia and declines in Europe narrow. From Japan, the Eco-watchers Outlook Survey for June nearly doubled expectations, while Current Survey came in 17 points above expectations and double the May reading. The Swiss unemployment rate for June saw a downtick from the previous month and lower than expectations. The North American session will start out with a weekly private survey on US mortgage applications. May consumer credit is expected to show a sizable uptick after April's $68.8 billion decline. Atlanta Fed President Bostic will speak during early afternoon US trading hours.

GOLD / SILVER

With another new high for the move and headlines buzzing about historic investment flows into gold ETFs, traders should expect gold to continue to rise off follow-through buying. Probably the most significant single bullish force in the gold market today is the exploding interest in ETFs. While it might be questionable to expect the historical pattern of investment inflow in the first six months of 2020 to be fully replicated in the second half of the year, the inflows have already surpassed the previous record full year investment total, which was posted back in 2009. In the first six months of 2020, gold ETFs "added" 734 tonnes. Also, the first-half inflow reading was higher than the record levels of central bank net purchases seen in 2018 and 2019. The World Gold Council pointed out ETF demand alone could equate to 45% of global gold production. Yesterday, gold ETFs added 402,574 ounces to their holdings, bringing this year's net purchases to 21.1 million ounces. The market is also being lifted by talk of a second surge in US virus infections that could rekindle widespread uncertainty on the US economy. The market appears to have entered a new era where central banks and investors are more than making up for losses in physical demand. Back in 2010, global central bankers shifted from a multi-decade pattern of gold sales into what has become a decade-long pattern of purchases. Growing investment interest has also extended into the silver market, with silver ETF inflows year to date surpassing 201.7 million ounces with an inflow of 3.04 million ounces yesterday. Extrapolating this pattern through the end of the year would put the additional silver demand from ETFs at slightly more than 320 million ounces, which approaches 30% of world silver supply. With a small amount of assistance from gold today, silver is likely to forge an upside breakout above $18.85, which would then set a course to retest the June high up at $19.03 later this week.

PGM

Clearly there was divergence within the PGM markets on Tuesday, with platinum gaining nearly $30 an ounce on palladium. The reawakening of investment interest in the gold market appears to be waking up interest in platinum, which has not had the historic explosion in prices that palladium has. With platinum prices sitting nearly $1100 an ounce below palladium, those looking for a gold-like investment could begin to look more favorably upon platinum in the coming months. We see October platinum clawing its way toward $900 with the market potentially seeing an added lift from the implementation of long platinum/short palladium spread positions. Critical support in October platinum is seen at $837.70, and the next resistance point is seen at $877.

MARKET IDEAS: While gold has had difficulty stringing together large gains, the upside breakout and fresh 8-year high yesterday should result in a certain amount of headline-inspired gains. The unrelenting flow of money toward ETFs has been the key driving force, with some investors suggesting historic stimulus could spark the first inflationary flare since the early 1980's in the event a vaccine is discovered and the recovery catches central bankers applying too much support. However, we would suggest the bull camp could garner help from the US dollar, with a decline in the index below this week's low of 96.50 likely to stir currency-related buying in gold. Today we see pivot point support in August gold at $1,793.20 with a measuring target derived from the April through June sideways consolidation situated up at $1,900.

COPPER

Both supply and demand remain in the bull camp

The latest wrinkle in favor of the bull camp from the supply front is news of a shutdown of a copper mine in the Congo due to an outbreak of the virus. With LME copper warehouse stocks continuing to post significant daily draws, the bull camp has to be heartened by both supply and demand factors. While not a major driving force, US scheduled data has remained positive, and that has been consistently joined by hope for improving Chinese demand. The improving China demand storyline was given added credence by yet another scrap copper import quota issuance. The copper market is moving toward a speculative overbought position with the last Commitments of Traders report putting the net long at 21,157 contracts. Since that data was collected, the copper market has forged additional gains of nearly $0.08, which could mean the copper market has the largest spec and fund net long position since March 2019.

MARKET IDEAS: The trend remains up due to the potential for more mining disruptions and because of entrenched views of improving Chinese demand. Apparently the market is unconcerned about the prospect of a softer Chinese demand season ahead and is undeterred by the fact that prices have now risen back to levels from before the world became aware of the virus threat. While the $2.80 level appears to be some form of psychological resistance, that level could now become near term support, with the market potentially culminating the four-month rally with a blow-off run all the way back up to the 2020 highs.

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