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Lack of gains off Fed dialogue highlight anemic bull camp

Commentaries & Views


In retrospect, the gold and silver markets’ reaction to news that the Federal Reserve was unconcerned about the prospect of continued reflation was anemic and therefore indicative of a residual bearish tilt towards prices. Certainly, Fed Chair Powell's congressional testimony was more dovish than the market was expecting, but his lack of concern for inflation over the coming year prompted some doubt toward the recent reflation effort in many commodities. On the other hand, Powell stated that the US economy is a long way from its employment and inflation goals and that rates would remain near zero until full employment is achieved and inflation is on-track to exceed 2%, and that should underpin metals prices. Therefore, Fed commentary should have been music to the gold bulls' ears, but instead the bull camp failed to emerge in numbers. Unfortunately for the bull camp gold ETFs reduced holdings for a seventh straight session yesterday, bringing this year's net sales to a considerable 1.8 million ounces. According to Bloomberg, the current string of gold ETF liquidation days is the longest since December 7th! Furthermore, silver ETFs reduced their holdings by 6.9 million ounces, bringing this year's net purchases to only 68.3 million. With investors backing away from precious metal ETFs and the dollar showing little direction, the bull camp will need to see a house vote on the stimulus plan on Friday to help April gold hold up around the $1800 level. Fortunately for the bull camp in silver, the charts are much more supportive of prices, with a general pattern of higher highs seen over the past five sessions. We suspect silver is also seeing some positive divergence with gold because of its industrial demand status, with surging copper prices giving silver a much different demand potential than gold. Critical support today in March silver is seen at $27.33.


We suspect that the platinum market will continue to exhibit significant two-sided volatility, with the past two sessions seeing in a significant, $100 trading range. Platinum ETF holdings on Tuesday saw a contraction of 1,656 ounces, leaving the year-to-date growth at 0.8%. Like the silver market, the PGM markets should continue to draft spillover lift from stellar reflation in copper and other industrial commodities, but there would not appear to be significant internal bullish buzz to start today's trade. Platinum and palladium sold off sharply on Tuesday, pressured by a steep selloff in the stock market, and that shows the PGM markets are sensitive to the growth/no growth question on the economy. Platinum should continue to garner support on ideas that investments in green energy will boost demand for the metal, but that hope is long term and difficult to document. The market might be held back somewhat by Amplats statements this week that they plan to increase platinum production in anticipation of stronger demand. April platinum could be headed for a further correction, with initial support at $1,231.30 and retracement targets of $1,218.10 and $1,186.90. While palladium also had a wide range on Tuesday, a significant washout on substantial volume was rejected at-the-same time that open interest fell off sharply, which hints at a credible low. We see initial support at $2,335 and then again down at $2,294.70.

MARKET IDEAS: The bear camp feels like it has an edge, as the markets failed to forge sustained gains after the Fed reiterated their decision to let inflation rise. Perhaps the Fed's discounting recent signs of inflation as mere temporary supply chain distribution issues discouraged some would-be buyers. Therefore, we think prices can chop in both directions, with a slight downside tilt and prices becoming tightly tethered to the direction of equities. The bias is down with today's gold low targeted at $1,790 unless a down trend channel resistance line up at $1,831.80 is regained on a close basis. The March silver contract has a slightly bullish bias to start, with the potential for positive divergence with gold. Key support in March silver is seen at $27.28 with critical uptrend channel support at $26.67.


Temporary overbought condition but bull trend remains

The copper market’s explosion over the past five trading sessions has been the result of escalating global deficit projections, with declining infections outside of China and China's return from holiday providing a bullish combination. However, there are arguments that the copper rally has been too fast and that the spec and fund net long position is historically overbought. The most recent COT report pegged the net long at a new record of 87,302 contracts, and since that data was collected, the market has gained another $0.37, thereby almost ensuring that this week's report will show another record long. On the other hand, economic statistics on housing remain very supportive of copper, and the market came away from the Powell testimony with a positive reaction, suggesting the bull camp was cheered by the Fed's reassurances of low rates into the future. A decline in LME copper stocks on Tuesday put them only 30 tonnes away from its lowest level since December 2005, which provides further evidence of copper's positive global demand outlook, which in turn adds to the argument of a massive global deficit. The International Copper Study Group said that copper had a 77,000-tonne global supply deficit in November and a 589,000-tonne deficit during the first 11 months of 2020, which provided an added boost to copper prices, as that January-November deficit reading was more than 160,000 tonnes larger than the deficit for the same period in 2019.

MARKET IDEAS: There is talk of a huge spec position built in Shanghai Exchange copper futures since the end of China's holiday week, and that could add some fresh anxiety for longs if prices start to pull back early today. There is plenty of fuel for additional long liquidation after this month's upsurge, so prospective longs should hold out for a sizable pullback before approaching the market. Near-term support for March copper is at the $4.1360, with resistance and the next upside target at $4.2240.

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