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Gold and silver vulnerable but more likely to chop sideways

Commentaries & Views


A lack of definitive direction from the dollar has allowed currency-related selling in gold and silver, but it is also possible that a 12% gain in Indian gold prices in terms of the rupee is discouraging demand in India. Indian gold prices have traded at a discount to world pricing, which is not surprising considering that the nation remains under significant lockdown due to its ongoing infection problem. The markets will be watching Bank of Canada’s policy statements today, as they watch all the key central banks for any sign that their “hopes” for inflation have turned into concerns about inflation. While gold ETFs saw inflows yesterday of 33,491 ounces, year-to-date holdings are still down 5.8%. Silver ETFs saw an outflow of 1.2 million ounces, but holdings remain 5.6% higher on the year. With gold, silver, platinum, and palladium trading lower in the face of a decline in US Treasury yields, the markets are apparently focused on the action in the dollar, but perhaps they are also fretting over Chinese inflation, which is prompting action from the PBOC to restrain prices of critical commodity prices. While higher yesterday, the dollar remains very close to recent consolidation lows and would not appear to be a large threat to the bull camp in gold and silver. The lack of a high reading from Chinese CPI has probably applied some pressure to gold and silver. A long-term negative for gold was seen from a report that a newly discovered deposit in South America could be the biggest in the world. August gold has critical pivot point/failure support down at $1,873.30. A breakout of a virulent variant of the coronavirus in a very important southern port of Guangzhou in China could become a major issue, as it could contribute additional inflation from supply chain problems. The outbreak is impacting a Chinese port city that is responsible for one-third of all Chinese shipping exports. Gold and silver might also see technical and deflationary liquidation.


With a massive downside breakout September Palladium damaging the charts yesterday, one would expect the bias to have shifted downward. However, the market did manage a bounce yesterday of $65 from the lows in a sign that the $2,750 level is a value zone. If Chinese inflation readings prompt the government to contain inflation, it could send a shudder through all commodity markets. Critical support is seen at $2,780, and failure to hold that level projects prices right back down to a quadruple low of $2,734. In a negative development from yesterday, platinum ETF holdings declined by a significant 8,176 ounces (-0.2%), leaving year-to-date gains in at 2.1%. The July Platinum contract pretty much held in place yesterday despite noted weakness in palladium and the rest of the precious metal markets. Still, the charts remain negative with lower highs and lower lows posted periodically and open interest on the decline since the large washout on June 3. Downtrend channel resistance and a fresh sell point in July Platinum is seen today at $1,177.55, and a retest of this week's low down at $1,142 is likely.

MARKET IDEAS: The precious metal markets are poised for a fundamental test today following further confirmation that Chinese inflation continues to flare at the wholesale level. However, Chinese CPI readings declined last month. As indicated repeatedly over the last two months, the precious metals markets have yet to exhibit a direct correlation with rising inflation and instead have focused on interest rates and currencies. Therefore, it would have been a major shift for precious metals to rally off today's Chinese inflation reports. We are not surprised to see gold and silver come under pressure today. Pushed into the market, we favor the downward track, as it will take a noted change in market focus to resurrect the bull case.


Corrective action to continue value seen down at $4.45

The copper market has been negatively impacted by today's Chinese inflation data, as the hot PPI reading has fostered ideas that the PBOC will be forced to pull back on stimulus or use policy threats to dampen price gains in various key industrial material prices like copper. In a negative supply-side development, BHP workers in Chile have agreed to extend talks two days, and that might show a willingness to get a labor deal. Adding to that is news that Russian copper exports increased from January through April and that copper exchange warehouse stocks in London are showing a pattern of inflows. However, some analysts are suggesting that the rise in exchange stocks is the result of destocking and not necessarily poor demand! Another potential negative for copper is signs that the Biden administration is assembling a team to confront the Chinese on their trade practices, as that could result in a resurrection of the trade war and in turn lift the US dollar. It is also possible that trade tensions between China and the US could result in China shifting copper and copper concentrate purchases to non-US suppliers.

MARKET IDEAS: While the July copper contract might have established strong value above the $4.4605 level, the overall global macroeconomic outlook has not accelerated enough to propel the market up and away from the $4.50 level. The bears have an edge today with a downtrend channel resistance line drawn from the May and June highs providing resistance at $4.6350.

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