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Gold and silver stand up to Chinese speculation limitations

Commentaries & Views

GOLD / SILVER

It looks like gold and silver longs dodged a bullet overnight when the first of what could be several Chinese government rules designed to quell speculative trading in commodities was announced, as the markets remained near five-month highs. The move by China to stem price gains reduces inflationary expectations around the world, but the precious metals can still garner support from weakness in the dollar and low US interest rates. With US rates at their lowest levels in two weeks and a 5-Year Note auction result to be released at noon today, traders could expect a bit of volatility in Treasuries and the precious metals prices at 12:00 Central Time today. Gold outperformed silver yesterday, but the upside breakout in June Gold could stoke press coverage and help improve investor demand for both metals. Several Fed members have stepped up this week and talked very optimistically about the state of the US economy and the Fed's ability to squash inflation when necessary. Gold’s rally above the psychologically important $1900 level could provide additional speculative follow-through buying today. Given gold's stellar gains of $143 so far in May, price action in the futures is likely to continue to rekindle investment flow into gold and silver ETFs. Gold ETFs have increased holdings for four straight days and silver ETFs for six straight days, the longest streak since last July. The net expansion in silver ETF holdings so far this year is 5.4%, while gold holdings have declined 5.7%. Gold has managed to rally in the face of chatter that inflation prospects worldwide were being reduced in the wake of weakness in copper, energy, and grain prices earlier in the week. While the silver market bounced off this week's low, its charts are less powerful than the gold’s. Prices are still $0.85 below last week's high and could be considered a cheaper alternative to gold and palladium. We see uptrend channel support at $27.59.

PGM

The PGM markets traded in tandem yesterday but not this morning, with the palladium market seeing some selling. We think the trade is convinced that the shift to electric vehicles or other next-generation modes of transport will result in increased PGM consumption. Furthermore, with new technology being discovered and platinum trading at nearly a $1,600 discount to palladium, it is possible that new industrial uses prefer platinum over palladium. On the other hand, platinum has been trading at significant deficit to palladium for several years, and the automakers do not appear to be altering manufacturing to use cheaper platinum instead of palladium. The palladium market has aggressively rejected the low forged on a hard break on Monday. It appears that some value has been discovered at $2,720.50 in palladium with strong value in July platinum seen at $1,166.

MARKET IDEAS: The path of least resistance is pointing up in the precious metals, with Fed dialogue centered on the solid condition of the US economy and not registering as much concern for inflation as was seen over the past two months. Nonetheless, we see gold and palladium as leaders within the complex, with gold seemingly benefiting from market inefficiencies and excess volatility in cryptocurrencies and from low interest rates. Gold and silver managed to forge new highs despite the Chinese government’s initial move to stem price gains thought to be caused by speculative players. The markets might see increased physical buying because of the government outlaw of commodity derivative trading by small investors, as those seeking ownership of gold and silver will be forced to buy bars and coins. Previous resistance at $1,900 in June Gold has now become thin support, with the next upside target of $1,950 possible by the end of the week, especially if weakness extends in the dollar and US Treasury yields continue to slip lower.

COPPER COMMENTARY

Chop between $4.44 and $4.60

While it appears that July Copper has found value at the $4.50 level, that level is not yet a significant consolidation low zone and might not support prices against bearish Chinese developments. However, the market has not faltered in the wake of fresh Chinese regulation designed to limit speculation in commodities. The government statements suggest that the new rules are designed to protect small retail accounts from significant volatility, but we would suggest that rules against commodity trading will be increasingly restrictive if a commodity super cycle emerges. However, the major supportive development for copper is the declaration of strikes at two BHP mines in Chile after unions rejected a contract offer from the company. Copper finished lower on Tuesday, but prices did not buckle in the face of news that the largest copper producer in Poland saw its monthly production jump by 10% over year ago levels.

MARKET IDEAS: We see the $4.50 level as a form of value, but those getting long the market may have to risk fresh long entry positions to at least $4.43. The spec and fund net long position was significantly overbought earlier in the month, so the market could need more long liquidation to find a balance.

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.