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We see today as a key "test" day for gold and silver

Commentaries & Views

GOLD / SILVER

It appears that a better-than-expected sweep of preliminary European factory and service PMI readings for March have sparked a risk-on commodity rally, which in turn has lifted gold and silver modestly. While the PMI data could be a one-off development, the world is clearly cheered by the prospects that Europe is showing green shoots despite recent activity rollbacks. Certainly, it is a long stretch to leap from anemic growth to reflation, but all commodities are higher to start today, despite another upside breakout in the dollar. Yet investors continued to be cool toward gold and silver, with gold ETFs yesterday dropping for 27th straight day and silver seeing a liquidation of 2.5 million ounces. Some traders are suggesting the metals markets are getting a delayed lift from the administration plan for a $3 trillion economic program, while others think the Fed's willingness to discount near term price signals could give inflation a "chance" to start up. The Fed has indicated that reflation is likely but will be transitory. It is also possible that strong demand for yesterday's 2-Year US Treasury Note auction has calmed fears of further increases in interest rates, which again clears a path for "transitory inflation." While gold and silver posted positive action overnight following the European data, we need to see those markets post additional gains in the wake of good US Durable goods sales later this morning to embrace the idea the markets are linking up with the economy again. In other words, we remain highly skeptical of the bull case. Furthermore, we would like to see gold and silver forge gains in the wake of a favorable 5-Year Note auction at mid-session. Today is a "test" day with key support seen at $1,722.70 in April Gold and $25.02 in May Silver.

PGM

While palladium has at times shown signs of regathering the bullish tide from last week, the market basically spent Tuesday within the prior day’s range and waffling around both sides of $2,600, which suggests that the bull case is moderating. However, it has continued a pattern of increased volume and open interest on rallies and has seen open interest level out and volume decline on the recent correction. Unfortunately for the bull camp, palladium ETFs have seen outward flows this week, and that combined with similar outflows from other precious metals highlights skepticism toward the entire sector. On Tuesday palladium ETFs saw another (albeit small) outflow of 528 ounces after a 6,091-ounce outflow on Monday. Seeing 6,500 ounces removed in two days is significant considering that total holdings are only 507,905 ounces. Certainly, the palladium market has been the strongest component of the precious metals complex, but outside market issues have increased resistance over price gains, and that could remain as unless the US durable goods number rekindles economic optimism. Critical support in June Palladium is back at a recent gap of $2,575, and a significant failure would be seen with a trade below $2,560. For platinum, an overnight inflow of 7,649 ounces into ETFs yesterday shows an increase in investment interest, but the market lacks bullish buzz, and prices have declined in the face of very impressive gains in palladium. We see the path of least resistance pointing down in April Platinum with a failure seen on a trade below $1,163.50.

MARKET IDEAS: Despite overnight gains in gold and silver prices, we see today as a "test" session with the markets potentially showing some correlation with the direction of the US economy. However, a good durable goods report is not a given, despite expectations, as the US is currently on a pattern of weak results. Even with a positive durable goods reading and good demand for today's 5-Year Note auction, the market could fail to extend initial gains. At least to start the bull camp has an edge, but the failure to hold yesterday's lows would likely extend the pattern of lower highs and lower lows established early this week. Therefore, critical support is seen at $1722.70 in April Gold. Silver prices have already forged a lower low this morning, and a violation of the overnight low of $25.02 could result in a return to the March consolidation low of $24.95.

COPPER

Solid support at $4.01 and solid resistance at $4.16

The copper market is drafting lift from the favorable sweep of European PMI data, but the market also appears to be drawing support from strength in most commodity markets. However, to see copper move above consolidation resistance would likely requires a resurgence of positive economic readings from China, unless today's US durable goods report clearly displays resiliency of the US economy. Certainly, the proposal of a $3 trillion US spending program is supportive of copper, but it would be foolish to expect a massive program to be passed quickly and therefore Chinese copper demand expectations should remain the key feature of the trade. The upside breakout early Tuesday and significant reversal from that rally highlights the market's solid respect for consolidation high resistance around $4.1650. In addition to recent suspicions of slackening Chinese demand, the market is also dealing with renewed activity restrictions in Europe and strength in the dollar. After two consecutive days of disappointing US housing/home data, a disappointing durable goods reading could reverse the risk-on vibe from early today and put the market in a risk-off mode. Fortunately for the bull camp, LME copper warehouse stocks saw a minor decline today, but they have still seen 11 daily inflows in the past 16 sessions and have also reached their highest level since December 21.

MARKET IDEAS: Once again the copper market has shown an inability to trade up through consolidation high resistance around the $4.1570 level, but the market also showed solid respect for support around the $4.01 level yesterday. The bull case has been injured by slack US housing data and by Europe’s struggles to contain the virus. Add in a strengthening dollar and signs of weakness in several key Asian industrial material prices this week, and it is clear the bull camp needs a lot of help (such as stronger than expected durables and lower US rates after the mid-day auction) to send prices back to the top of the consolidation.

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.