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Erosive action today again today

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets were split overnight, with Asian and Australian stocks lower in a catch up move to the US action on Tuesday and the rest of the world showing modest gains of less than 1%. Economic releases included softer than expected New Zealand business confidence and activity outlook surveys, a slight dip in Chinese consumer and producer price readings for August, slower than previous investment lending for homes in Australia, no change in the Swiss unemployment rate for August, and a 23.3% decline in Japanese machine-tool orders in August relative to a year ago. The North American session will start out with private weekly survey of same store sales and mortgage applications, followed by August Canadian housing starts, which are forecast to have a modest downtick from July's 245,600 annualized rate. The July US job openings and labor turnover (JOLTS) survey is expected to have a modest uptick from June's 5.889 million reading. The Bank of Canada is forecast to have no major changes to Canadian rates or policy.


Gold and silver have started off on a softer footing this morning, probably because of another upside extension in the US dollar. The dollar has now reached its highest level since August 12. It should be noted that the dollar’s recovery from a four-month slide into August 12 coincided with the largest 4-day washout in gold this year (-$200). At first glance, the charts in gold remain negative with the pattern of lower highs and lower lows. However, yesterday's new low for the move and rejection of that level was forged on a jump in trading volume, which suggests that bargain-hunting buyers were attracted to prices below $1920. In another supportive development, gold ETFs saw their 10th straight day of inflows, bringing the year to date net purchases to 26.7 million ounces. In a minor negative, Chinese consumer inflation readings softened overnight, but from a longer term perspective, that could support gold if the Chinese government sees that news as an opening to provide additional stimulus for their economy. From the overnight action it appears that gold and silver were put under pressure following news that a major vaccine trial was halted after an adverse reaction in one test subject, and that suggests both gold and silver are tracking classic physical demand developments at times. For today's action we leave the bias with the bear camp, primarily because of strength in the dollar but also because the market currently sits $11-$15 above what we see as solid value on the charts. The silver market is confronted with negative charts this morning, negative spillover from gold, signs of slack Indian retail silver demand, ongoing strength in the dollar, and a fourth straight day of outflows from silver ETF holdings. If there is a key positive today, it is news that the Indian Silver Exchange noted the largest delivery in 12 years yesterday. Nonetheless, we see the market slipping lower with the initial support again at $26.45, which in turn is also just above series of consolidation low support levels at $26.30.


The action in the palladium market on Tuesday should be very discouraging to the bull camp, as strength in gold, silver and platinum failed to cushion December palladium against a washout. The market has not even seen spillover lift from the platinum market, which benefited from a projection for a world supply and demand deficit. The World Platinum Investment Council has suggested it is possible that platinum could finally begin to take some industrial demand away from palladium due to the dramatic price difference. Fortunately for the bull camp in palladium, the spec and fund net long is very limited relative to history, which could help to cushion the market against a full return back to the bottom of the late August consolidation at $2,161. The platinum market showed strength in the face of weakness in palladium yesterday and a negative macroeconomic environment, and that suggests the market is coming alive. Obviously, very upbeat World Platinum Investment Council projections of a global deficit of 360,000 ounces combined with improved demand projections (off increased glass product demand for platinum from the explosion laptop and computer screens due to people working at home) is a powerful combination for a quiet market. On the other hand, the platinum charts are not particularly impressive, with a downtrend channel still in effect from the August high and a trade back above downtrend channel resistance at $951.40 necessary today to reverse that pattern. From a spec positioning perspective, a minor rally from current levels could put the spec and fund net long at its highest level since March.

MARKET IDEAS: While we are still long term bulls, we see the path of least resistance in gold, silver and platinum pointing down following the lack of recovery action yesterday after new lows for the move in gold, but more specifically because of the appearance of an ongoing rally in the dollar. While it is unclear if the setback in a vaccine study overnight was responsible for some selling in gold and silver, it does suggest that the precious metals markets are tracking some measure of physical commodity fundamentals, such as slackening physical demand prospects in the event the virus solution is further delayed, and that the current environment is presenting a negative vibe. We see support in December gold today at $1,921.60 and then again down at $1911. It could take a rally back above $1,980.40 to shift back into bullish environment. Close-in support for December silver is seen at $26.45, and it could take a rally back above $27.89 to ramp up bullish sentiment.


Some support at $3.00, but the bull case lacks buzz.

The December copper contract remaining in the bottom half of yesterday's reversal range, a new high in the US dollar, soft Chinese consumer price inflation readings overnight, and the sudden halt of a late stage virus study leave the bias in copper today pointing down. However, the overnight trade did take note of another sharp decline in LME copper warehouse stocks, and that in turn has rekindled the tight supply storyline that has been present in the market for many months. Some measures put the current stocks at their lowest level since 2005, with the suggestion that it is the result of interrupted production during the pandemic and China's surge in infrastructure spending over the last two quarters. Both the copper and steel markets continue to look for signs that China will launch into another infrastructure spending program, especially after Chinese consumer inflation readings softened overnight. However, copper remains significantly overbought from the perspective of the spec and fund net long, which likely approached record levels at the September highs.

MARKET IDEAS: While the December copper contract continues to hold within the wide range of trade, yesterday it that the market had run into fundamental and technical resistance. Ideas that China is temporarily forward-bought combined with market suggestions that the market needs additional Chinese infrastructure spending to restart demand, it is certainly cause to see copper baulk at prices near the 2020 highs. Logical corrective targeting in December copper is seen down at $2.9645, with even lower action possible if there is a major downside extension in global equities today.

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