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More inflation evidence, but the Fed chair will discount inflation.

Commentaries & Views

GOLD / SILVER

We continue to be a skeptical bull toward gold and even more skeptical toward silver. However, gold prices have shown resiliency over the past three-and-a- half weeks and have forged gains off a rise in open interest and generally strong trading volume. In the action today the markets will be presented with US producer price index readings for June, with expectations calling for a 0.6% gain, which is in the inflationary range but is softer than the gain last month. Another potential volatility event is midday testimony by the Federal Reserve Chairman to Congress, where the trade will attempt to glean the latest view and stance from the Fed. With Democrats agreeing on another large US stimulus package, it will be interesting to see if the Federal Reserve Chairman has any concerns that the stimulus may move inflation from transitory to sustainable. Certainly, gold continues to face a conundrum where strong inflation and stimulus packages are likely to firm the dollar and hold back gold and silver prices. The US CPI report yesterday failed to spark a typical inflation rally in gold and silver despite some price measures registering the hottest readings since 2013. It should also be noted that the CPI excluding food and energy was also hot and above expectations. A potential negative for gold and silver today comes from yesterday's 30-year US Treasury Bond auction, which showed dismal demand, which could put pressure on gold and silver from the rising interest rate argument. From a longer-term perspective, the gold market could be supported by supply disruptions in South Africa following reports of riots brought on by surging infections, a lack of vaccines, and financial problems from the pandemic. Silver has been solidifying consolidation low support just under $26.00 this week, and the market should benefit from news of a 1-million-ounce inflow into silver ETFs yesterday, news that Silver Corp. first quarter production declined 12% due to labor issues, and from a significant jump in silver ETF VIX readings this week, as we think that shows silver is beginning to react to daily events. In a potential bullish long-term development, the major South African gold miner Sibanye announced they would "wind down" gold mines in South Africa because they are nonperforming investments.

PGM

The bull camp in palladium and platinum was deflated by the lack of price reactions to yesterday's hot US CPI report. It appears that the palladium market is primarily a physical commodity instrument and thus far it is not interested in inflationary signals. However, palladium also failed to benefit from supportive fundamental news in the form of strong Chinese export readings for June, as those strong exports should help fuel further Chinese growth and therefore automobile sales. Close in support in the September palladium contract is seen at $2,791 and then again down at $2,780. Platinum prices on Tuesday held most of the gains forged on Monday, leaving a four-day recovery pattern on the charts. The platinum market should also be supported by an inflow to platinum ETF holdings yesterday of 2,359 ounces that brings the year-to-date gain back up to 3.2%. Unfortunately for the bull camp, there do not appear to be bullish fundamental themes operating in the platinum trade, so we remain skeptical of the late June and early July rally. We would also note that the spec and fund net long in platinum is relatively overbought compared to palladium and that trading volume fell off on the recent rally through the $1,050 level. This could make it difficult to sustain pricing above $1,110. Critical support in October platinum is seen at the 21-day moving average of $1,093.70 and then again down at $1,085.30.

MARKET IDEAS: Even though we remain skeptical toward the bull track for gold, the market has shown the ability to extend a slow, hard-fought recovery in the face of adverse headlines. The gains following the CPI report yesterday were disappointing to the gold trade, which highlights a lack of classic inflationary reaction in the precious metal space. With a likely repeat of yesterday's inflation news today from US PPI, followed by Federal Reserve chairman testimony to Congress, it is likely that the debate over transitory or sustained inflation will be front and center. However, few in Congress are likely to express concern for inflation, with the Democrats planning to force through a $3.5 trillion stimulus package. The bias in gold is up, but the control by the bull camp is limited and at times fleeting.

COPPER COMMENTARY

Failure to rally off Chinese exports & inflation is bearish

Entering the third trading session of the week, the copper charts favor the bear camp with a pattern of lower highs and lower lows combined with weakness in iron ore and nickel prices potentially pushing copper into a new low for the week. The bull camp should be thoroughly disappointed in the market's inability to rally yesterday following stronger than expected Chinese export data for June. In other words, the markets saw favorable economic signs from the world's largest consumer of copper and failed to push prices up following that news. Later in the session, copper also failed to rally off a hotter than expected US inflation result, which also highlights a tenuous bull contingent. On the other hand, China did document soft copper import readings, the dollar is showing signs of strengthening because of US inflation readings this week, and fear of lost global copper demand can be justified by an expanding number of areas encountering a surge in infections and political/economic unrest in South Africa, Cuba, and China.

MARKET IDEAS: We give the edge to the bear camp in copper today, as a patently supportive Chinese export reading failed to rekindle the bull track. The market also failed to benefit from news that China recently moved to reduce its reserve rate requirements for banks. Support and downside targeting in September copper seen at $4.2325.

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