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We think gold and silver are vulnerable

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets were evenly mixed overnight, waffling around both sides of unchanged. Overnight economic news included negative Japanese imports and exports for October, softer than expected wage readings from Australia, and hotter than expected UK consumer and producer price readings. However, overall Euro zone pricing showed mostly as expected, benign inflation readings. The North American session will start out with a weekly private survey of mortgage applications, followed by October housing starts, which are expected to have a modest uptick from September's 1.415 million annualized rate. October building permits are forecast to have a minimal uptick from September's 1.553 million annualized rate. October Canadian CPI is expected to have a minimal downtick from September's 0.5% year-over-year rate. Chicago Fed President Evans will speak during morning US trading hours, and New York Fed President Williams, St. Louis Fed President Bullard, Dallas Fed President Kaplan and Atlanta Fed President Bostic will speak during the afternoon. Earnings announcements will include Lowe's, Target and TJX before the Wall Street opening and NVIDIA and Copart after the close.


We remain highly skeptical of the bull case, especially following Federal Reserve projections of a choppy environment for the US economy ahead. Certainly, developing weakness in the dollar is a potential support for prices, but it could take a definitive breakout below 92.00 in the Dollar Index to spark enough currency-related interest to reverse this morning's initial downward bias. Investment in gold ETFs continues to roll to other markets (namely equities), and the gold market is not benefiting from what should have been a strong Indian demand season. However, an indirect support for prices is an ever-expanding list of forecasts that cryptocurrencies are poised for historical gains. To that point it should be noted that a mainstream analyst yesterday predicted Bitcoin could trade to $40,000 next year! On the other hand, it is not a given that an explosion in Bitcoin would translate into significant gains in gold, as many think Bitcoin is a replacement for gold. While UK price measures overnight signaled the potential for inflation, the trade remains hesitant to embrace that view. Yesterday gold and silver ETFs saw outflows, with gold posting a fourth straight day of declines and the largest Gold ETF seeing its holdings fall to its lowest level in four months. Infection counts have sparked new restrictions on restaurants, bars, gyms, and other venues, and we think the trade will adopt a deflationary selling instead of a flight to quality buying posture.


It appears that leadership in the PGM markets has shifted to platinum, with the trade recently presented with a series of dramatic deficit forecasts, which if fulfilled would mean the platinum market saw deficits in seven of the last 10 years. The world platinum investment counsel this morning suggested that the deficit would be four times as large as its initial forecast, based on a combination of lower supply from the virus mining shutdowns and structural problems but also from an improvement in demand. Their projections call for a deficit of 1.2 million ounces this year, with a 2021 deficit projection of 224,000 ounces. When one adds in projections earlier this month that some industrial processes might begin to shift from palladium to platinum, this could add dramatically to the platinum deficit. Near term upside targeting and thin resistance is seen at $950 in January platinum, but we suspect that level will soon become solid support for an eventual retest of the post pandemic highs. Palladium prices appear to have lost direction, with a four-day consolidation pattern perched just above last week's major spike low. In retrospect, the bull camp should be discouraged given that palladium prices have shown very little "bounce" from a three-day slide of $215. Yet another undermining influence is the fact that palladium has tracked sideways in the face of a four-day, $90 rally in platinum. The trade appears to be playing a long-term macroeconomic position, anticipating platinum to gain consistently on palladium in the coming year.

MARKET IDEAS: While we cannot rule out more hard-fought gains in gold and silver prices, we have significant difficulty isolating a specific bullish theme capable of gaining control. In our gut we think the bull camp needs a full risk-on, end of pandemic, broad-based physical buying wave to get gold and silver prices back above the November highs. However, current conditions suggest a liquidation environment is surfacing off the gathering storm of infection headlines. In the end, a continuation of infections, benign US inflation data, and signs that the Fed is content to sit on the sidelines could easily send prices back down to last week's consolidation lows of $1,853.90 in December gold and $23.81 in December silver.


The bias is up as Chinese forces overshadow non-Chinese forces

The importance of China in the copper market has been magnified even further, with copper futures at the Shanghai International Energy Exchange beginning trade. Clearly, the copper market is mostly undeterred by the escalation of virus problems in the US, as prices remain near this year's highs and the bull case is getting additional assistance from very strong zinc and aluminum prices. It also appears that developing weakness in the US dollar and talk of materials shortages inside China have set the stage for a continuation of strong Chinese copper imports in the months ahead. If it were not for the massively overbought spec and fund position, we would project copper to continue higher without significant volatility, but given the uncertainty from the virus, more gains are likely to come along with whippy, two-sided action. It should be noted that LME copper warehouse stocks continue to decline, which suggests that non-Chinese copper demand is not a deterring force for the bull camp. While not a major negative for copper prices, a labor dispute was settled at state-owned Chilean producer Codelco, but that labor dispute was not the primary one in the markets focus over the last three weeks.

MARKET IDEAS: The copper market is significantly overbought, sitting nearly $0.20 above the early November lows, and the threat against non-Chinese copper demand is growing. Nonetheless, the overall bias in prices is likely to remain up, as the prospect of strengthening Chinese copper demand continues to trump all other concerns. Remain bullish as long as December copper holds key support at $3.1765.

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