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Gold vulnerable but silver to hold its own

Commentaries & Views


While the gold market is showing signs of bouncing this morning, action in the dollar suggests the path of least resistance in both gold and silver should remain down today. Since last Thursday the dollar has gained 80 ticks, and it has had two consecutive days with very large trading volume, which suggests the bull camp is formidable. For this reason, we are surprised by the strength in gold and silver early today, we and think it is likely the result of short covering following yesterday's huge downdrafts. While there is chatter that internet investment of gold is rising and partially offsetting the losses at physical retail outlets, investment in the form of ETFs continues to be very anemic, with holdings down 6.8% on the year! US Treasury yields have fallen from yesterday's peak, and today's US scheduled report slate is relatively benign. Later in the session the trade will be presented with a Fed speech and the US Fed Beige Book release, and that could rekindle talk of tapering. Once again, the gold market has seen a 4-week rally reversed in a single trading session, unable to translate a rally into a sustained uptrend. The bull camp should be very discouraged, considering the break yesterday took place despite news that Indian gold imports for August jumped by nearly 50% over year-ago levels and reached their highest level since the first quarter. The Indian buying was reportedly from dealer restocking, bargain-hunting, and pre-festival interest.

About the most positive thing that can be said about the silver market is its capacity to hold up in the face of a very large washout in gold. However, the commodity market washout yesterday combined with ongoing strength in the dollar leaves a heavy weight on the back of silver going into today's action. The market held a relatively benign spec and fund net long positioning that could dampen selling. Fortunately for the bull camp, silver ETF holdings remain 2.9% higher on the year, but they are not showing signs of consistent daily growth. On the other hand, the charts remain constructive, with the large setback yesterday failing to remove all the gains from Friday. Uptrend channel support is seen at $24.02, with resistance at $24.30.


While the selling in PGM markets yesterday appeared to have its genesis in the gold market, the damage to the charts has set the stage for a retest of the August lows down at $2,270 in December Palladium. Part of the selling yesterday was the result of renewed strength in the dollar and in sympathy with the big washout across the commodity markets. Fortunately for the bull camp, the most recent positioning report showed the specs to be net short palladium. The significant downside extension yesterday probably added significantly to the net short and created an oversold setup. While platinum avoided the aggressive liquidation that gold and palladium experienced, the bias in the market shifts down with macroeconomic uncertainty surfacing at the same time the dollar appears to have gone back into an uptrend. Unfortunately for the bull camp, the latest spec and fund net long in platinum leaves the market vulnerable to additional stop loss selling. MARKET IDEAS: We leave the path of least resistance pointing down for the precious metals, but we also expect the rate of decline to slow significantly. It does appear that the benefits of a delay in tapering have been lost for now and that further gains in the dollar are likely to pressure December Gold down to $1,781 and possibly $1,773 if the news today from a Fed speech and from the Beige Book results rekindle tapering chatter. Unlike gold, silver avoided significant technical damage to its charts yesterday, and the market remains in an uptrend channel with critical support today pegged at $24.02.


With global equity markets lower overnight, further strength in the dollar and indications that stimulus might not be in order in China, the sharp range down in December Copper this morning is well-deserved. The market also fears a decline in Chinese seasonal demand. Restricted fabricating rules in China could limit factory buying, but another significant pressure on demand could come from the crackdown on property holdings. The trade is concerned with the recent drop in China’s housing starts, and it is unsure what the daily infection rate is inside China. The market fell yesterday after China posted its lowest copper imports in two years, and we suspect that news continues to weigh on copper prices today. The global demand outlook is not any better. About the only positive for the market is a pattern of daily contractions in LME copper stocks, with the last two days posting a decline of 13,000 tonnes.

MARKET IDEAS: The path of least resistance is pointing down in copper, as news from China is nearly all bearish and news from the rest of the world is either negative or neutral. The December contract has failed at a critical pivot point of $4.25 this morning, leaving the next downside target and support at $4.1920.

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