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The bears retain control off Dollar strength and slowing fears

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets overnight were higher with the exceptions of markets in Tokyo and Hong Kong. While the 2.3% gain in the Australian stock market was an outlier, many others gained more than 1.5%. There was a flood of scheduled data released overnight, but the takeaway was difficult to determine, as a manufacturing and services PMI data offset each other. Manufacturing PMI readings for September were better than expected but services PMI data were generally softer than expected. The North American session will start out with a weekly private survey of mortgage applications, followed by a July FHFA housing price index that is expected to have a modest downtick from June's 0.9% reading. The Markit "Flash" US Manufacturing PMI is forecast to have a minimal uptick from the previous 53.1 reading. Fed Chair Powell will testify in front of a special House select coronavirus subcommittee. Cleveland Fed President Mester and Chicago Fed President Evans will speak during morning US trading hours, while Fed Vice-Chair Quarles, Boston Fed President Rosengren, Atlanta Fed President Bostic, Minneapolis Fed President Kashkari and San Francisco Fed President Daly will speak during the afternoon. Earnings announcements will include General Mills and Cintas before the Wall Street opening.

GOLD / SILVER

The $1900 level in December gold has failed as support, and it is possible that the market is now on a direct path to $1850. The initial driving force behind the selling in gold and silver is likely the fresh upside breakout in the dollar, but news of another net selling day of gold and silver ETF holdings yesterday probably adds to the deteriorating view. Apparently the market has discounted Citi forecasts for gold prices to hit a record before the end of the year, perhaps because that forecast is heavily dependent on extreme uncertainty surrounding the election, which is still far enough into the future to be relegated to a background issue. Even precious metals mining shares are under pressure this week, showing a breath of bearish attitude toward the whole metals sector, which in turn was likely stoked by the Federal Reserve chairman testimony yesterday reiterating the "very long and arduous" recovery of the US economy. In other words, the threat of sustained deflationary conditions continues to sit heavily on the shoulders of both metals, with declines accelerating into and through the return of stiffer lockdown rules in the UK. It is possible that gold and silver are discounting the potential of a quick recovery of physical demand in India and China again, and with a similar cooling-off of investment demand on the ETF front, demand is suspect. In the near term bulls might be fortunate to see December gold respect support at $1874.20, but those looking to pick a bottom might have to risk those positions to a significant stop at $1819.90. Not surprisingly, the silver market is also under ongoing liquidation pressure this morning, with physical demand fears likely the primary force behind the slide, but spillover pressure from gold weakness and the rising dollar provide added pressure. Likely downside targeting in December silver is just above $22.50. Yesterday, silver ETF holdings dropped for a fourth straight session, but net purchases on the year remain above 265 million ounces for a net gain so far in 2020 of 44%.

PGM

It is apparent that spillover pressure from gold weakness and dollar strength leaves the environment for palladium generally bearish. While the outlook toward the Chinese economy remains positive, there are several anecdotal stories this week that have pointed to a temporary pause in commodity buying, as the government is thought to be taking stock of the impact of their initial stimulus moves. In many cases buffer stocks have returned to normal levels. With macroeconomic psychology throughout the rest of the world deteriorating because of infection concerns and choppy data, a return to the recent consolidation lows at $2155 should not be ruled out. About the most positive thing that can be said about platinum today is that it has temporarily respected the $850 level, which in the past has been a key pivot point. However, it also appears that the January contract is on its way back down to the trading range from mid-May through mid-July bound by $900 and $808. The May-July consolidation took place after the $250 recovery from the March lockdown panic, and was likely a "relief bounce" with the spike above $900 found to be expensive after signs that the aggressive improvement in schedule data was not going to result in a global "V Bottom". It appears that the resurgence of infections/potential lockdowns combined with spreading fear that the US recovery is losing momentum is justification for a return to that lower trading range.

MARKET IDEAS: The path of least resistance remains down in gold and silver again today, with a number of bearish forces sitting on the backs of the markets. With the dollar appearing to shift into an upward gear (as opposed to merely short covering) and investors consistently standing back from ETF investments, prices might have to slide until bargain-hunters surface. For today, we see somewhat credible support close-in at $1,885.40 in December gold, but we will remain bearish unless prices manage to regain $1,925. Initial downside targeting in December silver is seen at $22.50.

COPPER COMMENTARY

Choppy to lower action as Dollar strength weighs and techs balance

While the bull camp should be emboldened by yesterday's capacity to trade most of the session in positive territory, we get the feeling that this week's highs will be solid resistance until the depth and breadth of the UK lockdown is known or there is some fresh confirmation of Chinese economic growth. Overnight stories have suggested that base metals have topped for now following noted weakness in iron ore, developing weakness in zinc, and reports that more copper mining operations are moving back to full activity. In a minimally supportive storyline, the major Polish copper company KMGH reported August production to be lower than year-ago levels, and they reported August sales at levels markedly above year-ago levels. While the copper market probably won't raise its US copper demand expectation because of a 14-year high in existing home sales, that development certainly helps to temper recent deflation fears.

MARKET IDEAS: We continue to maintain a bullish view for the long term based on supply/demand perspectives, but we fear corrective action in the near term. We continue to make note of the significantly overbought spec and fund net positioning of a market already sitting more than a dollar above its March lows. The Chinese economic report slate remains inactive, but trade chatter is already starting to posture for increased economic activity into their national holiday next month. Still, that might not support prices in the near term. A key pivot point today is seen at $3.0320 with a failure taking place on a trade below $3.0135. 

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