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Support is building but rates fears linger

Commentaries & Views


The metals markets enter the Wednesday trade under pressure off a combination of lingering fear of higher interest rates, negative investment flows away from ETFs, and bearish charts. The bearish bias in gold is confirmed by the market’s inability to rally despite persistent Fed indications that it will be patient with low rates until the US economy is producing strong employment. Gold ETFs saw a 12th straight day of outflows, bringing this year's net sales to 3.1 million ounces. Silver also saw a large outflow of 6.7 million ounces for a third straight day of sales. While the metals markets have not shown direct correlation with the ebb and flow of industrial metals prices in China recently, aluminum and steel prices overnight reached their highest level in 10 years. The gold market should be disappointed in news overnight that Indian growth in January might have shifted down, as that countervails reports earlier this week of a significant year-over-year jump in gold imports. The data tracker in India showed the recovery in Indian fell back to only 0.9% growth from a gain of 2.4% in December. The New York Fed President indicated that GDP growth this year could be the strongest in decades, but we think it could take further "opening up" in more US states for gold and silver to begin to throw off the negative stigma of interest rate fears. Despite seeing the outflow from silver ETFs yesterday, several analysts are turning more bullish toward silver, pointing out the rising prospect of a recovery in industrial demand. However, the market this morning has not benefited from increases in key Chinese industrial materials in aluminum and steel. While we do not get the sense that the precious metals markets are on the cusp of embracing a significant return to physical/industrial demand, ongoing vaccine progress and three states moving to re-open overnight should increase the risk to fresh sellers in silver. On the other hand, it could take a-number-of news cycles touting the wind-down of the pandemic and reignite reflation views.


The PGM markets continue to be held down by weakness in gold and from fears of rising interest rates. The markets have also been undermined by soft Chinese data, with China overnight posting a decline in a private services PMI reading for February. Fortunately for the bull camp, platinum ETFs yesterday added another significant inflow of 4,314 ounces, pushing the year-to-date gain in holdings close to 1%. However, outside market conditions have failed to shift the needle in favor of the bull camp, and the lack of economic optimism toward China leaves thick resistance at $1,218.30 and then again at $1,232. The palladium market remains mired in a sideways to lower chop with a slight edge given to the bear camp today because two attempts to rally above $2,367.50 were rejected. Flows to palladium ETFs remain inconsequential, with the investor interest seemingly focused on platinum. However, year-to-date gains in palladium holdings are +3.2%, and credible support is seen at $2,296.

MARKET IDEAS: While it appears that the bear camp has seen bearish fundamental arguments moderate, lingering rate fears continue to hang heavy on the markets. Even if the US dollar extends yesterday's downside action, we see that as a short covering influence instead of a fresh speculative buying catalyst. However, both gold and silver have forged reliable support levels on the charts, and those traders who are short at current levels could be at a risk of significant adversity if the pandemic is about to end, as that could provide a return to reflation sentiment.


Less bearishness but Chinese news and rate fears limit.

Even though aluminum and steel prices in China surged to 10-year highs overnight, it has not sparked speculative buying in copper this morning. However, the copper market should derive some support from news that Codelco (the world's largest copper producer) saw production in January decline to its lowest since July. Furthermore, BHP's largest copper mine saw production fall 16% in the month to its lowest level since February 2019. Overall, Chile posted a 0.7% year-over-year decline in copper output in January. It should be noted that the copper market literally exploded yesterday after a massive, high to low slide of $0.34, which may have been the result of technical buying more than fresh speculative buying. LME copper warehouse stocks sit just above 15-year lows, but they showed a modest inflow overnight

MARKET IDEAS: As in many other physical commodities, the copper bull camp is heavily reliant on a return to reflation psychology, and despite a very positive start in US equities (after a massive rally yesterday) the reflation story has not returned to front page status. However, renewed strength in key Chinese industrial material prices overnight and news of several US states reopening should increase the risk to shorts. Critical support moves up to $4.1330, and a trade today above $4.2535 could result in a concentrated wave of stop loss buying as well as fresh outright speculative buying.

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