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Gold and silver have premium in prices off Fed hope

Commentaries & Views


While the gold and silver markets have shown some positive action this week, the anemic rate of gain on the charts and the limited amount of bullish buzz detracts from the bull case. Investor sentiment toward gold remains extremely negative, with ETF holdings yesterday shedding holdings for the 22nd straight day. While silver ETFs added 526,959 ounces to their holdings yesterday, the market continues to be plagued by periodic outflows. Hope for something dovish/supportive from the US Federal Reserve is underpinning prices this week, but we are not hopeful that the Fed statement will result in a pulse up unless the Fed specifically attempts to counter the rise in real rates fostered by weak action in US Treasury futures. Unfortunately for the bull camp, Treasury Bond prices sit within ticks of a downside breakout, and that could be a force that pulls the rug out from under gold and silver prices later today. It should also be noted that the Dollar Index sits just under 5-day highs early this morning and is likely to show some trend signals in the wake of the Fed's statement and that in turn could prompt a trend decision in gold and silver. So far, this week’s hope for improved physical gold and silver demand has been dealt a blow in the wake of very disappointing US economic indicators and perhaps even more significantly by news that Europe suspended the AstraZeneca vaccine. We expect the Fed to continue to promise undying support for the US economy until full employment is reached, but its power to cushion gold and silver seems to have dissipated. Despite silver showing positive divergence with gold at times last week, less outflow from Silver ETF holdings, and signs it can rally off improved physical commodity market conditions, we think it will track down with gold. The declines in volume and open interest since the highs posted at the end of February could be a sign that futures buyers are staying on the sidelines. Near term support for May silver is seen at $25.61; those looking to get long might have to risk those positions below $24.84 (which is a lot of risk).


With another large daily platinum ETF inflow of 17,490 ounces yesterday, it appears that investors have "discovered" or become more interested in a market capable of benefiting from a return to global growth and more importantly capable of benefiting from inflation. It should be noted that platinum ETF holdings are approaching 4 million ounces, which is very significant relative to world supply and demand. Furthermore, seeing a pattern of daily ETF inflows on the order of the 0.5% f could become very significant very quickly. In a minimally supportive development, Russia's Norilsk indicated their 2021 platinum group metals output may fall short of targeting by 22 tonnes or 710,000 ounces. Platinum lagged the explosion in palladium prices yesterday, but we suspect it will see a benefit from the tailwinds of that move. Critical support in April platinum is seen at $1,195.30 today, and we will remain bullish as long as the April contract respects support at $1,182. Clearly, the PGMs have delinked with gold and silver, especially with palladium exploding yesterday and reaching its highest levels since the beginning of the year. The trade appears to be embracing the prospect of improved global vehicle sales and perhaps is even expecting a measure of improvement in jewelry and industrial demand. Prices are now within 10% of their all-time highs, but with the very low spec and fund net long of 981 contracts, the market should retain significant speculative buying capacity. Unfortunately for the bull camp, the massive range up move yesterday leaves little in the way of close in chart support, and to pull in additional aggressive buying, it might require a definitive return to broad, risk-on conditions.

MARKET IDEAS: We see divergence within the precious metals complex continuing, with platinum and palladium positioned for more gains and gold and silver looking vulnerable to stop loss selling. While we see the bias pointing down in gold and silver, we are not interested in short strategies at current levels, as gold is relatively close to solid even-number support at $1,700 and the spec and fund net long in gold has been reduced significantly following the large washout in late February and early March. Silver on the other hand sits almost $1.00 above solid support, and therefore the risk of being long is significant, especially if there is a post-Fed meeting letdown. It would be surprising to see the Fed actually "take action," and the mostly likely takeaway today would be cheering on already established promises. However, if the Fed can convince traders that US interest rates are artificially high, it could give gold and silver relief rallies.


The bears have an edge unless Fed news changes the paradigm

While the copper market has rejected yesterday's three-day low in the early action today, another noted jump in daily LME warehouse stocks gives the impression that recently, demand has not outstripped supply. LME stocks are now the highest since January 11 and have had nine daily inflows in the last 11 sessions. On the other hand, the London copper trade has seen chatter this week about improving demand, and it is aware of the South American supply disruptions. Furthermore, the market should draft support from overnight news that Chinese January/April refined copper output jumped 12.3% over year-ago levels. Another potential supportive item is that Bloomberg is reporting that steel blast furnaces in China's main steelmaking city are resuming production in a possible sign of Chinese growth and/or demand from government infrastructure programs. However, favorable Chinese economic data from earlier in the week was discounted, the trade is growing concerned about the brisk pace of gains in global exchange warehouse stocks, and very disappointing US industrial production/capacity utilization readings yesterday dented non-China demand expectations. Those demand fears are also being stoked by the suspension of AstraZeneca vaccinations in Europe. When one adds in a lofty spec and fund net long in copper of 64,037 contracts and the damage to the charts yesterday, we see downside follow-through and a retest of $4.00 ahead.

MARKET IDEAS: The bull trend has not come to an end, but the market appears to have shifted into a slightly negative fundamental and technical posture. Fresh hope for growing copper demand at the end of the pandemic remains in play, but yesterday's events clearly call near term demand expectations into question. Chart damage could push some would-be buyers to the sidelines. Initial downside targeting is seen at consolidation low support at $4.0095 and then again down at $3.9720.

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