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The markets are sniffing inflation

Commentaries & Views

GOLD / SILVER

It appears that gold and silver have come through the run-off election and a wave of softer data from Europe retaining upward momentum. Fresh downside breakouts in the dollar and US Treasury bonds give off signals of major change in the structure of the markets with Treasury prices falling below levels seen just before the virus panic surfaced. In other words, Treasury bonds appear to be looking through the crisis (which seems misplaced given a daily US infection rate of roughly 200,000, slow vaccinations and lockdowns underway again), and therefore it is possible that Treasuries are sensing inflation from aggressive US government spending and a further explosion in US Treasury supply. While one Senate race in Georgia remains too close to call (with counting to resume this morning), the Democrats have gained one seat and would appear to have a lead in the other race, and that adds to debt and deficit fears. Yesterday Gold ETFs saw a 10th straight inflow with the addition of 56,320 ounces, with silver ETF's seeing an inflow of 553,096 ounces. In short, US rates might get be pressured higher by the markets, which in turn could force the Fed to step up bond purchases, which is also inflationary. The bull camp has a-number-of fundamental themes operating in its favor, and the charts remain bullish. 

PGM 

The aggressive rallies in the PGM markets yesterday were at least partially if not mostly driven by the arrival of the new virus strain in South Africa, with mining operations at the largest producer increasing the threat of disrupted global supply flows. The supply and demand pendulums have shifted back in favor of demand outstripping supply, and therefore the markets’ reaction on Tuesday was justified. The platinum rally would appear to be fanned by the massive jump in palladium, which in turn threatens to push prices back to a premium of $1,500 an ounce above platinum. This could accelerate rotation from palladium to platinum in certain electronic product manufacturing processes, and the two markets are likely to continue to rise in sync. Unfortunately for the bull camp, PGM ETFs saw minor outflows yesterday, suggesting that the sharp rally in futures yesterday failed to stir investors to buy ETF instruments. Palladium sits within $200 of its all-time highs, while platinum sits a much more significant $1,170 an ounce (almost double) below its all-time high! At times on Tuesday the triple digit gains in the palladium market were difficult to justify, but it is possible that hedge funds, a small measure of investors and a wave of technical traders decided it was time to jump into the long side. At one point palladium prices were up $189, but traders should keep in mind the overall size of the market (supply, demand, and trading volume) is relatively small in the world of commodities, and prices can respond aggressively to modest increases in supply fears and modest buying off fresh bullish themes. Near term upside targeting in March Palladium is the November high up at $2,529, with April Platinum resistance and targeting derived off the weekly charts $80 above the Tuesday US close. 

MARKET IDEAS: While we give the bull camp an edge, traders should expect volatility directly ahead and the potential for the trend to be set for the first quarter. While not official, the odds of a sweep by the Democrats in the Tuesday Georgia run-off election are high, and that could add to inflation fears that many suggest have already surfaced in the form of rising global industrial material prices. Inflation prospects are also fanned by expectations for swift additional US government stimulus/spending given a Democrat rubber stamp in governance. US Treasury yields overnight have spiked upward and that in of itself could be inflationary, especially if the Fed decides to fight rising rates with even larger bond purchases. Critical pivot point support in February Gold is seen at $1,922 (a long way down, but we expect volatility), with critical pivot point support in March Silver at $27.07. 

COPPER 

The bull camp now has even stronger fundamentals unfolding. 

With another new upside breakout this morning, copper trade has kept its favorable Chinese demand views intact despite disappointing Chinese Services PMI readings for December overnight. However, it is also possible that a big picture, broad-based commodity price rally is being sparked by reflation buying on the part of hedge funds and speculators. There are also fresh supply fears surfacing in Peru which have resulted in blocked shipments from the mine involved in the labor dispute. The market seemed to fully discount bearish news of a jump in production from Chilean miner Codelco yesterday. The increase in production was reportedly offset by declines in production at the world's largest copper mine in Chile. The most significant bullish force is likely to be a dramatic increase in the size and quickness of additional US stimulus in the wake of the Georgia election. 

MARKET IDEAS: The bias is up, but major macroeconomic and political forces are likely to result in very large daily trading ranges. To derive a technical objective/resistance point in March Copper, it now requires the use of weekly charts, which produce a price target 10 cents above today's early highs. 

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