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Better chance of respecting support but bears retain an edge

Commentaries & Views

GOLD / SILVER

In retrospect, the metals markets were put under pressure from the beginning of this week by a recovery in the dollar and by surging interest rates. While the dollar has fallen back from its high from yesterday and Treasury yields have softened a but, it does not appear that those negative forces have dissipated. Unfortunately for the bull camp, gold ETFs saw a decline of 221,116 ounces in holdings yesterday, resulting in a year-to-date net sale of 973,984 ounces. Certainly, there is a definitive wave of "reflation" news stories providing some support to gold and silver, but that prospect is canceled out by fears that interest rates could rise despite the intentions of the US Federal Reserve. Certainly, strength in the dollar and ideas that reflation will not begin until lockdowns are rolled back are valid fundamental arguments, and therefore the quickest path to bull market action in gold and silver is a very broad acceptance of the view that the pandemic is entering its final stage. As the Federal Reserve Chairman has reiterated several times over the last 13 months, the Fed will not relent until the virus has been "solved" and the US has full-employment. Positive developments overnight included news that Swiss gold exports in January increase by 7.2%, with shipments to India jumping by 12%, exports to the UK jumping to 5.2 tons from 0.3 tons, and exports to the US jumping by 15%. We would also note that gold prices opened lower on the Indian futures exchange but then rebounded on what would appear to be moderate bargain-hunting buying. While gold has spent the entire overnight trade in positive territory versus the Wednesday close, the charts generally remain negative, and it could be difficult to rekindle a dominant bullish condition without a surprising bullish headline development. Surprisingly, the charts in silver remain positive, with the market standing up to noted weakness in gold, rising interest rate fears, and a strengthening dollar this week. Fortunately for the bull camp, Silver ETF holdings saw an inflow for the third straight day, with a modest inflow of 319,010 ounces and a year-to-date net purchase level of 85.8 million. Critical support in March silver is seen at this week's collection of lows around $26.87.

PGM

With a two-day trading range in April platinum of $127 and the last spec and fund net long at a lofty 43,151 contracts, the platinum market was due some corrective action. With April platinum having rallied $156 since the last COT report, the spec and fund net long could be the highest in 12 months. However, inflows into platinum ETFs have picked up significantly over the past four sessions and are likely to continue to flow in given the bullish headline generation resulting from futures gains. Platinum ETFs saw another large inflow yesterday with 9,288 ounces purchased, bringing the year-to-date gain to 2.6%. It should be noted that platinum ETF holdings worldwide are now approaching 4 million ounces, with ETF levels becoming an important factor relative to annual production and consumption. Demand from investment is not the only supportive force today, as physical demand is improving with Swiss exports in January reportedly jumping 83% from December figures in a possible sign of a dramatic expansion of movement in a commodity that is not usually shuttled in numerous directions. We think fresh buyers should wait for a trade below $1,231 to reenter on the long side. We think palladium will continue to be dragged around by platinum, but like the gold and silver trade, the palladium currently has more bullish charts than platinum. The spec and fund net long in palladium remains very small, and it is possible that palladium will not exhibit significant stop loss selling waves during periods of weakness. Those looking to enter the long side of palladium might be best served if orders are placed below $2,337.

MARKET IDEAS: Further corrective action in gold, silver, and platinum should not be removed from the equation today, as the idea of reflation continues to be punctured by fears that spiking Treasury yields will check rising prices. When one adds an upward tilt in the dollar to the equation, the bear camp retains a fundamental edge. We think the reflation argument needs real evidence of "opening-up" stories, break away gains in equities, and a delivered stimulus package to become a more formidable force. For now, we see fresh long entry points in April gold down at $1,761, with similar long entry targeting in March silver seen at $26.87.

COPPER

The return of China has sparked speculative buying

Clearly, the copper market is not held back by the doubts of reflation, unending virus-inspired economic headwinds, and a severe overbought technical condition, as prices this morning have exploded on the upside. Not surprisingly, reports from a copper company CEO suggesting that non-Chinese copper demand is returning as China returns from holiday is a powerful bullish combination. Furthermore, this week has brought several estimates for large global copper deficits and even a prediction of $10,000 prices in London, indicating that the bull camp is very confident. It should also be noted that iron ore prices jumped in China on the return from holiday, and that in turn fostered expectations of Chinese buying in many commodities overnight. Obviously, the high today has probably resulted in another new high in the spec and fund net long position in copper, but the longs certainly have justification following projections of a very refined copper deficit ahead.

MARKET IDEAS: While the path of least resistance is still pointing up in copper, we suspect prices will fall back some as China’s return has probably brought a temporary overreaction. On the other hand, those attempting to trade the short side of copper should be very aware of the potential for significant losses if declining US infections begin to foster opening-up dialogue and/or "end of pandemic" dialogue.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.