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Classic historic inflation readings are flashing for real

Commentaries & Views

GOLD / SILVER

At least in the early going today, gold and silver should draft support from a downside extension in the Dollar Index. However, so far gold has failed to benefit from the dollar slide’s, while silver has benefited. Fortunately for the bull camp, interest rates have declined in the face of definitive inflationary pressures over the last two months, and that should increase the chance of "real inflation" later this year. In the meantime, ETF holdings of gold and silver continue to decline, with the gold holdings yesterday reaching their lowest level since last May. Despite recent declines, silver ETFs have gained 35.2 million ounces this year, which could signal a shift in leadership. One could argue that strong growth in China, significant strength in Chinese commodity imports and growth in US (despite ongoing restrictions) could spark improvement in silver physical demand. An analyst overnight indicated that "infections matter the most," and as this week's infection count appears to be falling back (Sunday 54,000, Monday 56,000), commodity prices should be underpinned. Unfortunately for the bull camp, we do not see or feel a bullish buzz in gold today despite overnight strength. While it appears that silver remains in a downward motion, this morning's highs have broken out above a 2 1/2-month downtrend channel. With technical signals positive, if the daily infection rate suddenly falls out of bed (because of the vaccination wave), it could provide a bullish spark for gold and silver.

PGMs

The bifurcation of the PGM markets might end today with palladium’s favor waning temporarily and platinum minimally benefiting from spread reversals and classic short covering. July platinum saw a large $100 slide over the past five trading sessions, which justifies at least temporary bounce. Another wave of strong Chinese data seems to have translated into further upward revisions in palladium demand from the Chinese auto sector. The platinum market is heavily reliant on diesel vehicle sales, as those manufacturers rely on platinum for their auto catalyst feedstocks. At least in the near term, the talk of substitution of palladium with platinum is given little merit, and it is possible that some speculative positions are using short platinum positions to protect long positions in palladium. While the markets did not give much attention to news earlier this week that South African PGM production continues to decline, that fundamental is adding to the upward track in palladium prices. Near term upside targeting is the contract high in June Palladium at $2,719. In platinum, a third straight day of aggressive selling yesterday projects an extension down to the next key point on the charts at $1,148.50. Unfortunately for the bull camp in platinum, that market has maintained a burdensome spec and fund net long position near 14-month highs. But given the oversold condition of the market, those looking to implement fresh shorts should wait for a trade back above $1187.

MARKET IDEAS: We see the path of least resistance pointing up in gold and silver over the intermediate term, but for that to continue, it would require even larger declines in the Dollar Index and a downside breakout in US infections. Given the magnitude of the breakdown in the dollar, a notch lower in interest rates and very definitive quantitative inflation signals, the bull camp might ultimately expect a return to 35-day highs in June Gold up at $1,759.40. While the silver charts look less supportive than gold, we would not be surprised to see silver come alive if expectations for forward movement in the global economy materialize. It should also be noted that May Silver contract forged a reversal of a significant downtrend pattern. A sudden decline in US infections could set the trade up for a quick return to $26.74.

COPPER

Lack of bullish reaction to strong Chinese economic news is bearish for now.

While copper is showing strength overnight with a three-day high, the bull camp should be very discouraged with the lack of upside action this week in the face of a series of favorable Chinese economic developments. The inability to drive sharply higher (which has been the standard reaction to positive Chinese data over the last year) might suggest prices have reached a temporary plateau until non-Chinese copper demand improves. While some traders suggested that the 60-day sideways consolidation has moderated the spec and fund net long position, it remains at inflated levels, and a close below $4.00 could result in another wave of stop-loss selling. Adding into the bear case is an ongoing pattern of daily inflows to LME copper warehouse stocks. Overnight LME stocks increased by 3520 tons for a sixth straight session of large inflows.

MARKET IDEAS: In the near term, we find it difficult to predict higher copper prices following their lack of upside sensitivity to very bullish Chinese economic news. On the other hand, world global refined copper deficit forecasts remain in place, and we view consolidation low support down at $3.9435 as very solid on a closing basis. It is possible that the bull camp is waiting for US daily infections to forge a downside breakout before upwardly revising non-Chinese copper demand expectations.

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