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The bears hold an edge from charts and fundamentals

Commentaries & Views

GOLD / SILVER

While the gold and silver markets are only marginally lower to start today, a fresh upside breakout in the dollar, renewed fears of rising US rates and Asian gold discount pricing leaves the edge with the bear camp. The precious metals did see a temporary lift from reports of Chinese warplanes violating Taiwan airspace, but that issue does not appear to have legs. Even though the US Treasury Secretary walked back hawkish dialogue, her statements still echo in the market, especially with another Fed member indicating that it was "time" to begin discussing tapering. Fortunately for the bull camp, gold ETF holdings increased by 6,341 ounces yesterday, but it will take a long-established pattern of inflows to shift investor sentiment on gold in favor of the bull camp. On the other hand, noted real estate/investor Sam Zell reportedly bought gold because he sees inflation reminiscent of the 1970s. In the near term the path of least resistance is pointing down, with the injury to the markets yesterday from a fundamental perspective not easily erased. Despite the gold market's capacity to hold together in the face of serious threats against Indian gold demand early in the week, the escalation of interest rate fears could now magnify that threat. The silver market fell victim to the same interest rate impact as gold, and given the aggressive rally on Monday, further downside corrective action is likely today. In yet another negative development, silver ETF holdings yesterday declined by 102,869 ounces.

PGM

The negative shift in overall market psychology yesterday has pulled palladium prices back from their highs. One would have expected to market to surge into new high ground following news of record US light truck sales and very strong vehicle sales (highest since 2005) for April. The seemed to have saw strong enough vehicle sales to add credence to the surging demand and tightening supplies arguments. June Palladium has now failed at the $3,000 level on three separate occasions, and it may have difficulty extending its pattern of new all-time highs if overall market psychology returns to the "risk off" condition seen yesterday. July Platinum also forged an upside breakout yesterday, but it was knocked back from that high in a fashion that suggests an intermediate top could be in place. We suspect the action yesterday is very disappointing to the bull camp given that stories of reopening of Europe failed to spark improved platinum demand hopes for diesel catalytic converters, especially after the very robust US gasoline vehicle sales results. While we think platinum demand for diesel auto catalyst will begin to improve as Europe reopens, we would not rule out a near term corrective setback down to $1,195.50.

MARKET IDEAS: While it appeared that gold and silver were garnering lift from inflation vibes on Monday, the real spark of buying might have been attributed to aggressive actions by China against Taiwan. However, comments from the US Treasury Secretary shifted sentiment 180 degrees, and that impact might not dissipate quickly. Gold has failed to breach the $1,800 level on five occasions since the middle of last month, a sign that buyers are balking at that level. But buyers of June Gold did seem to emerge down at $1,765. A two-day trading range of $1.39 combined with a sweeping reversal puts July Silver in a corrective track, with likely targeting seen down at $25.84.

COPPER

The bias shifts up with a fresh breakout up overnight

With a new higher high for the move early today, another noted decline in daily LME copper warehouse stocks, a London copper trade above $10,000 and potential supply threats in Chile from government royalty charges, the bull camp regains the edge. All things considered, the action in the copper market on Tuesday was a testament to the staying power of the bull camp. Prices remained within striking distance of 2 ½-year-highs despite a significant risk off event flowing from US equity market declines, hawkish Administration dialogue, and disappointing US scheduled data. We also note the resiliency of the copper market following a surprise annual surplus forecast from the International Copper Study Group on Monday. However, the ICSG could be assuming worse demand than will be seen on an annualized basis once the year is complete. In another indirectly supportive news item, Australian iron ore exports jumped sharply in the most recent readings, which likely indicates ongoing strong growth in China.

MARKET IDEAS: While the bull camp appears to have regained control, it appears that the rate of gain today will be subdued unless sentiment in the equity markets improves and initial news from the US jobs front shows progression of the US recovery. Critical support is seen at $4.49 and using the recent range as a measuring tool, targets the upside at $4.61.

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