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Lower chop as ultimate Fed impact is likely to be negative

Commentaries & Views

Gold and silver remain off balance today along with the rest of the metals complex as the global macroeconomic view have been undermined by weaker equities, trade barbs between the new US administration and China, and from the ever-nagging reports of global deaths and infections. Adding into the initial negative is fresh chart damage, a strong dollar (it remains locked in a sideways pattern), and little bullish expectation for today's US Federal Reserve statement. However, it is likely that the Fed will extend its bond purchasing efforts for the foreseeable future. Unfortunately for the bull camp, gold ETFs reduced holdings by 42,776 ounces yesterday, reducing this year's net purchases to 444,035 ounces. On the other hand, silver ETFs added 2 million ounces to their holdings, bringing this year's net purchases to 26.1 million. In addition to the disappointing overnight data and a bad start to US/China relations, commodities in general might be undermined by signs that iron ore and zinc fell aggressively at the start of their Wednesday trade in Asia. There was speculation overnight that the PBOC might begin to taper stimulus due to double-digit industrial profits, which could deflate the stimulative efforts of the US Federal Reserve. However, the PBOC later did promise not to exit prematurely from its supportive policies. Divergence between gold and silver yesterday point to a lack of definitive leadership and to some a lack of definitive bullishness. However, we suspect that bot markets will have an early "Fed put" today from expectations that the Fed will be very dovish and intense with its calls for more fiscal stimulus. However, we think the news will ultimately disappoint gold and silver bulls. The markets should have benefited from the hottest monthly jump in a private house price survey reading since July 2014, but they are apparently not yet sensitive to inflation signals. Unfortunately for the bull camp, solid consolidation low support in April gold is not seen until $1,834, with similar solid consolidation low support in March silver at $24.85.

With a series of lower highs and lower lows over the prior three trading sessions, news that the US government is planning to shift to electric vehicles, ongoing weakness in gold and a lack of positive Chinese economic data over the last week, it is possible that platinum prices will erode further. It appears that the pattern of inflows into platinum ETFs dissipated (yesterday saw an inflow of only 124 ounces), and some analysts have lowered their price forecasts for this year. Fortunately for the bull camp, trading volume and open interest have declined on the retrenchment from last week's high, suggesting that the bear camp is not aggressive or in large numbers. We see critical support today at $1,076.50 in April platinum and would lower long-term buy orders to $1,055. The palladium market also damaged its charts overnight and appears to be under pressure because of its physical market standing but also because of spillover pressure from the rest of the metals complex. If gold remains under pressure, we look for a retest of the December 21 low at $2297 in March palladium.

MARKET IDEAS: We see the metals markets remaining in an erosive posture with the potential for a temporary recovery off the Fed's statements. However, we think that the Fed will fail to provide "fresh supportive action," and that could rekindle liquidation in the late afternoon trade. The bull camp lacks a solid theme, and the charts offer little in the way of close-in support. Furthermore, the dollar continues to track sideways with periodic strength, and the markets yesterday did not show sensitivity to a significant inflation signal from a private US home price survey and the announcement that the US Federal minimum wage would be doubled. It should also be noted that April gold has waffled around both sides of its 200-day moving average for 13 days and has now failed to hold that consolidation area this morning. Traders should look for a further correction in April gold to $1,834, silver targeting of $25.01 and $24.85, and platinum likely falling to $1,071.

We see slow erosive action but expect consolidation lows to support

While the negatives facing the copper market this morning are not significant, signs of weakening in several recently high-flying industrial material markets in China, negative charts, and indications that US/China relations are off to a rocky start (the Biden administration has indicated they will remain tough on China) should give the bear camp confidence. On the positive side of the equation is a fresh supply threat could be developing at the world's largest copper mine. The union is negotiating a fresh wage deal, and the odds of a strike might be elevated with employees emboldened from a massive return to work bonus last year. LME copper warehouse stocks declined again overnight, but that supportive news was offset by reports that KGHM saw its December copper sales come in moderately above previous year’s levels. In a negative demand development, Japan posted the lowest copper products output in 45 years last year with a 14% year-over-year decline.

MARKET IDEAS: While it is possible that copper could draft buying interest ahead of US Federal Reserve dialogue this morning, we think the Fed will not leave commodity prices strong into the close. In our opinion, without renewed optimism off fresh speculation that daily US infection rates are falling, the bias is copper will remain down. Recent consolidation support is pegged as a target at $3.5635 in March copper.

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