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The trend has shifted down in precious metals sell rallies

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets overnight were mixed, with Chinese, Japanese and Australian stocks lower and the rest of the world carving out very minor gains. Japanese industrial production and capacity utilization readings for August were in softer than expected, price readings from Spain were anemic, and Euro zone industrial production readings for August were disappointing. The North American session will start out with a weekly private survey of mortgage applications. The September producer price index is expected to have a moderate uptick from August's -0.2% reading, and the core producer price index is forecast to have a modest uptick from August's 0.6% reading. Richmond Fed President Barkin and Fed Vice-Chair Clarida will speak during morning US trading hours, while Fed Vic Chair Quarles and Dallas Fed President Kaplan will speak during the afternoon. Earnings announcements will include UnitedHealth Group, Bank of America, Wells Fargo, Goldman Sachs, Infosys and US Bancorp before the Wall Street opening while Alcoa and United Airlines report after the close.

GOLD / SILVER
While the December gold contract rejected another downside extension overnight, prices remain within a negative chart pattern and fundamental psychology remains damaged due to the growing likelihood that a stimulus agreement will not be reached before the election. Furthermore, the dollar is giving off signs of adding to yesterday's impressive range up recovery move, which is understandable given that the US economy looks to be forced to go it alone (without stimulus) for another month at least. On the other hand, high-frequency data of daily activity from cell phones/GPS and other signals shows the US continues to recover as activity levels-out in Europe and Canada. The leveling of growth in certain areas is not surprising given that global infections passed 38 million this week, according to John's Hopkins University. US airport security screenings yesterday reached a 7-month high in a sign that US travelers are slowly regaining confidence. However, with signs of recovery suspect in many portions of the world, expecting increases in physical gold and silver demand in the short term is ill advised, as purchases of those metals are undertaken by a very small percentage of the population and tend not to be undertaken at the early stages of a recovery. From a technical perspective, the gold market has fallen below its 21 day moving average this week, tested the 100 day moving average with the overnight low, and saw notably higher trading volume on yesterday's large liquidation break, thereby giving the bear camp the technical edge. Fortunately for the bull camp, gold ETFs added to their holdings yesterday for a 5th straight trading session, bringing this year's net purchases back up to 28.2 million ounces. While the silver market is tracking higher this morning, it also forged a lower low in the early action and was confronted with news of a 12% increase in silver production from Fortuna in the third quarter. It also saw silver ETF holdings liquidate 1.3 million ounces, for the third straight day of outflows. Recovery action in gold and silver should be viewed as an opportunity for wounded longs to exit the market and for aggressive sellers to enter.

PGM
While the December palladium contract did not make a lower low overnight, it remains under a cloud of disappointment following a significant washout in the face of very upbeat Chinese auto/vehicle sales. The primary demand source for palladium (auto catalyst production) was largely discounted, with a big decline almost coinciding with the release of total Chinese vehicle sales that are now running above last year's non-pandemic levels. The washout yesterday was forged on the highest trading volume since the second half of August, which suggests an appetite for the downside track. Fortunately for the bull camp, it appears that yesterday's low was rejected and that low showed respect for a consolidation low zone earlier in the month around $2303.20. In the near term we will view rallies as short covering, not long accumulation. While the damage in the platinum market earlier this week was not as severe as in other precious metals, evidence of slowing throughout Europe hits right at the heart of platinum demand for auto catalyst in a prime diesel engine area. Fortunately for the bull camp, platinum ETFs yesterday saw an inflow of 9,775 ounces, helping offset disappointment from a very large outflow on Monday. The January platinum contract fell below the 200-day moving average on Monday, which means the market is now below all three key moving averages, the 21-day, 100-day and now the 200-day. Going forward, we favor the bear track but would prefer to sell rallies of $40-$50 off the Tuesday low.

MARKET IDEAS: Unless something changes considerably, the path of least resistance looks to remain down in gold, silver and platinum. A slight upward track in the dollar, technical failures at moving average points on the charts, 38 million infections worldwide, and a lack of swift action on a US stimulus package gives the bear camp the prevailing an edge. Therefore, traders should be sellers of December gold on a rally back to $1918, looking for a retest of $1890 and possibly $1855 in the event a major equity market washout accentuates economic disappointment. Similarly, the trend in the silver market has shifted down, supply news is bearish, and silver has the added vulnerability from a lack of periodic safe haven buying interest. We would be a seller of December silver on a rally back to $24.89, looking for a near term downside target of $23.09.

COPPER COMMENTARY
Temporary corrective action not a reversal of trend

GENERAL: After yesterday's fundamental disappointment from copper’s dive in the face of stellar Chinese copper import data, it could be difficult to rekindle speculative buying interest. Underpinning copper prices today is a more definitive risk against supply from a labor dispute at the world's largest copper mine in Chile. However, with the strike threat centered on supervisor-level employees, production at the mine will not be totally crippled. It should also be noted that another mining dispute at a Canadian owned facility in Chile will see a meeting to attempt to end that strike. In a major overnight negative for copper, LME copper stocks jumped by 16,725 tonnes, thereby taking away that supportive supply-side theme. Fortunately for the bull camp, the hope for persistently strong Chinese copper demand provides a strong underpin for prices going forward. It should be noted that January through September 2020 Chinese copper imports were pegged at 4.9 million tonnes versus only 3.5 million tonnes in 2019, indicating imports are in a pandemic year are running hotter than in last year's normal economic environment.

MARKET IDEAS: While the path of least resistance might have shifted down in copper with yesterday's failure to rally on bullish news, seeing very strong Chinese copper import news should make it difficult to press prices consistently lower. It is likely that the copper trade was significantly overbought into last week's highs and in need of a normal corrective setback, so it isn't surprising to see prices retrench in the face of the unrelenting expansion of global infection numbers and from the failure of Washington to act to support the US economy. We see initial support and targeting at $3.0115 but would not expect a decline to lower support down at $2.9775 unless there is a major macroeconomic letdown.

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