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The bulls hold an extremely thin edge

Commentaries & Views

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While we are still skeptical of the bulls’ case in gold and silver, the action this morning suggests they retain a measure of control, with a potential for prices to claw back toward last week's highs of $1863 in February gold and $25.99 in March silver. Clearly the markets continue to embrace the call for "aggressive stimulus" from the incoming Treasury Secretary, and we suspect that "hope" for the $1.9 trillion Biden stimulus package will remain a supportive force through the pomp and circumstance of the inauguration. Additional support today could be seen from is another lower low for the move in the dollar, but it could take a decline below 90.00 in the Dollar Index for currency-related buying of gold and silver. While not as significant, seeing a wave of stronger than expected CPI and PPI readings from the UK and Germany overnight fosters some inflationary expectations that were primed by comments from Janet Yellen yesterday, who suggested that the country needs to stimulate aggressively and worry about debt and inflation later. While supply has not been a dominating force for gold recently, news that Russian gold production declined by 6% on a year over year basis from January through October provides support. Countervailing the lower Russian 11-month 2020 gold production is a higher 2021 production forecast from Hochschild and increased quarter over quarter production from Antofagasta. It should also be noted that Chinese gold prices have transitioned from a discount to a premium off what is likely a sign of increased retail demand into the Chinese New Year holiday. Reuters reports that Chinese gold prices have been discount to global prices for 11 months. Perhaps that signals a change in their demand patterns. We think the bull camp needs more than modest dollar weakness to sustain gains above last week's highs of $1,864 in February gold and $25.99 in March silver. The 200-day moving average in gold offers resistance at $1858.35 with consolidation resistance seen in March silver at $25.86.

The platinum market damaged its charts yesterday with a temporary three-day low and the lack of a definitive recovery/correlation with stronger gold and silver prices. On the other hand, both platinum and palladium should draft support from news that South African PGM production in November declined by 16.1% on a year-over-year basis and from a very significant daily inflow to platinum ETF holdings of 17,233 ounces. Unfortunately for the bull camp, concern for Chinese, German, and US infections looks to remain a limiting force for platinum prices in the near term. Furthermore, the spec and fund net long position remains problematic, and euphoria in global equities might be needed to push prices back to resistance up at $1,130. The palladium market also damaged its charts yesterday with a 5-day low, and the appearance of a further decline back to a double low of $2,344.50 remains in place today.

MARKET IDEAS: While we remain skeptical toward gold and silver, and we do not see a definitive, sustainable bullish fundamental theme capable of driving prices sharply above recent consolidation resistance on the charts of $1,863 in February gold and $25.99 in March silver, the bulls have the initial edge to start today. But if the Dollar Index slides below 90.00 and appears to be headed back to contract lows and Washington is rife with intentions to pass a quick stimulus package, the bull camp could garner more than a slight edge.

The bulls hold a thin edge, but they need stimulus progress.

With global equities higher overnight, general optimism in the US with the transition of power today (increased stimulus hopes), a decline in LME copper warehouse stocks, and lower full-year production figures from Antofagasta (down 4.7%), the bull camp has several factors operating in its favor. Other positive influences include US aluminum prices nearing record levels and a residual lift from calls from the incoming Treasury Secretary for very aggressive fiscal stimulus. The market did damage its charts yesterday with a 4-day low, but it has tempered that with a recovery back into the middle of the last three weeks’ trading range. A key underpin for copper is the ongoing declines in warehouse stocks, which continue to make fresh six-year lows, as that should temper a large portion of near-term demand concerns.

MARKET IDEAS: A general risk-on vibe this morning, a rejection of compacted selling yesterday, signs of tightening exchange supply, record Chinese 2020 refined copper output and unending hope for US stimulus underpins copper above near-term consolidation support of $3.6050.

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