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Sharp declines in treasury yields equal higher gold pricing

Commentaries & Views

GOLD / SILVER

In retrospect, we are surprised that gold held up following the FOMC meeting statement release yesterday, as some discussions among Fed members centered on timing for the "beginning" of discussions on tapering. However, seeing gold forge a higher high overnight is not surprising considering that US Treasury Yields have fallen sharply again overnight. 30-year bond yields are now at their lowest level since February 11, and to round out the bullish environment, the US dollar is under pressure early. It is likely that a significant washout in crude oil prices, a fifth straight day of ETF gold liquidation, and initial weakness in platinum, palladium, and copper is holding back gains in gold and silver. The precious metal markets are relieved with the FOMC meeting minutes, which showed the Fed aware of inflation but disappointed with the amount of recovery in the economy. The quickest way to a significant inflation problem is for the economy to remain sluggish while classic price measures firm in the background and the Fed focuses on full employment. The current condition appears to be a textbook example of an inflationary setup, but the investment community has yet to embrace that situation. In the short term, the $1,800 level in August gold is likely to be a critical pivot point instead of a launching point for higher prices, as the gold market lacks a catalyst beyond falling Treasury yields. The silver market has not rallied as significantly as gold and was unable to hold the gains made over the previous five trading sessions. On the other hand, it remains out of the direct firing line in the ebb and flow of interest rates, currency action, and inflationary maneuvering by the Fed. Silver market remains a physical commodity in need of a more robust global economy and/or significant positive price leadership from crude oil, and/or gold. We see September silver restricted to a trading range bound by $26.91 and $25.80.

PGM

While the palladium market appears to have lost upside momentum over the past 36 hours of trade, investors have shown interest in palladium ETFs, with 4,332 ounces purchased yesterday and the year-to-date gain in holdings up 11%. While the market did not make a higher high for the move yesterday, the close was the highest close since June 2, which leaves the charts pointing higher. The trade will be presented with inflation data from China late tonight, with producer prices expected to be slightly softer and consumer prices be little changed from the previous month. It is possible that the trade will see Chinese economic conditions as negative or as a limiting force for palladium. September palladium contract appears to have built a shelf of support above $2,770, and we would not rule out a near term test of $2,924.50. Not surprisingly, the platinum market has shown little in the way of definitive direction since the large washout in the middle of June, as physical demand is not expected to ramp up until the auto sector chip shortage is ended and the opening-up of Europe sparks an expansion in diesel vehicles sales. However, it is possible that the diesel sector will not recover as quickly as gasoline driven cars, as many analysts think a portion of diesel demand will be lost to electric vehicles. Overnight, platinum ETF holdings increased by 1,421 ounces bringing the year-to-date gain to 2.9%. We see the platinum market restrained within a range defined by $1,113 and $1,050.

MARKET IDEAS: The bull camp retains an edge in the but not in silver. However, both metals should continue to draft support from further declines in US Treasuries, as the precious metal trade seems to attach a higher level of importance to falling interest rates than to strength in the US dollar. In the end, we leave the edge with the bull camp in gold but think the risk of buying above $1,818 is unattractive for now.

COPPER

Vulnerable to liquidation if Chinese inflation is low

It appears that September copper has found value around the $4.2340 area, as the market has discounted a temporary surge in the US dollar and is holding up relatively well in the face of news that the Chinese National Food and Strategic Reserves administration indicated that more releases of copper, aluminum, and zinc will be coming to alleviate price pressures in those materials. Fortunately for the bull camp, copper is taking some direction from falling US Treasury yields, especially after the US Federal Reserve meeting minutes indicated the economic recovery was not living up to their expectations, as that could delay tapering. Tonight the copper market will see an important series of Chinese price readings from both factory gate and consumer prices, and that should impact copper prices in the Friday morning US trade.

MARKET IDEAS: While we give a slight edge to the bear camp early today, we see the most likely trade action to be further sideways consolidation. While not a major bearish issue yet, reports of a surge in delta variant infections in Asia and in pockets of the US emboldens sellers and discourages bargain-hunting. We peg buying support down at $4.23 and selling resistance at $4.40.

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