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Bounce today not a resumption of upward motion

Commentaries & Views


GOLD +1.80, SILVER +0.02, PLATINUM +0.93

OUTSIDE MARKET DEVELOPMENTS: Global equity markets overnight were higher with the exception the FTSE 100. Global economic news of importance released overnight included softer than expected Chinese consumer and producer price index readings for January, a softer than expected Japanese tertiary industry index reading for December, hotter than expected year-over-year CPI readings from the UK, a month over month contraction in UK consumer Price Index readings of 0.1% and hotter than expected UK producer price index readings for January. Also released overnight UK retail prices in January came in unchanged off expectations of a decline of 4 tents percent, UK house prices inched higher, overall Euro zone industrial production came in hot at 1.2% relative to expectations of a gain of only 0.3%. The North American session will start out with a weekly private survey of mortgage applications followed by January readings for the import price index and export price index, both of which are expected to have sizable downticks from their December readings. January retail sales are forecast to have a sizable uptick from December's -1.9% reading. January Canadian CPI is expected to hold steady with the previous 4.8% year-over-year rate. December Canadian manufacturing sales are forecast to have a sizable downtick from November's 2.6% reading. January US industrial production is expected to have a moderate uptick from December's -0.1% reading while January capacity utilization is forecast to have a modest uptick from December's 76.5% reading. December business inventories are expected to have a moderate uptick from November's 1.3% reading. The February NAHB housing market index is forecast to hold steady with January's 83 reading. Minneapolis Fed President Kashkari will speak during morning US trading hours while the minutes for the January FOMC meeting will be released in the afternoon. Earnings announcements will include Shopify, Analog Devices, Kraft Heinz and Barrick Gold before the Wall Street opening while NVIDIA, Cisco Systems, Applied Materials, Synopsys and Nutrien report after the close.


With the dollar showing weakness overnight, energy prices regaining their footing and most physical commodities trading higher, the path of least resistance in precious metal markets today has shifted up. However, Chinese inflation data was soft, while UK inflation was hot and therefore the classic inflation story line is tamped down. While not overly significant, gold ETF holdings yesterday increased by 32,983 ounces while silver ETF holdings jumped significantly with an inflow of 3.4 million ounces. On the year, gold ETF holdings are 1.7% higher and silver ETF holdings are 2.3% higher. Traders should watch silver ETF holdings closely, as market chatter suggests that discontented crypto currency holders might be migrating into silver! From a technical perspective, the gold market yesterday failed to take out the November high and prices fell back aggressively from the high to post their lowest close in three sessions. Obviously, from a fundamental perspective the de-escalation of the Ukraine situation served to force or chase a wave of flight to quality longs from positions and that could continue again today. In fact, the inability to support gold and silver in the wake of a significant 1% jump in US PPI for the month of January and in the wake of weakness in the dollar, highlights markets favoring the bear track. It should also be noted that gold failed to rally despite strength in bitcoin and in the face of a 9.7% year-over-year increase in US PPI. Certainly, seeing Russia return troops to their home base points to a possible de-escalation of tensions, but without some form of concessions few expect the Russian President to relent. Fortunately for the bull camp, the net spec and fund long in gold has been consistently reduced since the 2-year high back in November and seeing the net spec and fund long fall to 185,000 contracts could suggest the market has become "mostly balanced". The most recent net spec and fund long in gold was 235,362 contracts. In the silver market, prices appeared to run into a "wall" at the $24.00 level with silver also failing to benefit from an extremely hot US PPI result. With the most recent COT positioning report showing a net spec and fund long of only 33,000 contracts in silver, it might not take much in the way of liquidation to put the net spec and fund long down to the lowest level since June 2019! In conclusion, the bear camp regains control, with the focus remaining on Russian developments.


Not surprisingly, the issue that served to throw palladium prices $215 higher from last Friday's low, also caused a significant downside pulse in prices yesterday. In fact, at times yesterday the March palladium contract was $154 lower on the day despite a weaker dollar and a recent net spec and fund "short" positioning. However, as indicated already, it would be uncharacteristic of President Putin to "give up" so soon and so easily and therefore the threat against PGM supply has not ended. From a technical perspective, the March palladium contract has significant consolidation support starting at $2176 and culminating at $2165. With the platinum market not participating fully in the Russian supply threat in the first place, the amount of disappointment selling yesterday was limited. Consolidation support in April platinum begins at $1,004 and culminates down at $991.10.


Unless Russia shows fresh aggression, gold and silver markets will remain vulnerable to liquidation. However, in addition to a moderation of geopolitical tensions, gold and silver prices are undermined because of an upside breakout in long-term US treasury yields. As indicated already, the gold and silver markets yesterday forged extremely wide trading ranges and are likely to continue to gyrate wildly until the Russian situation is resolved and the magnitude of the rise in US interest rates is determined. We see support today in April gold at $1,843.30 and then again down at $1,830. In silver, the market appeared to be stopped dead in its tracks on a bid to trade above the $24.00 level. Furthermore, at times the March silver contract fell back by more than $0.90 highlighting an interim blowoff top. On the other hand, there has been market coverage suggesting that crypto currency investors have become disillusioned with the volatility and lack of reward for flight to quality conditions and some are reportedly moving into silver! Consolidation low support in March silver is seen at $23.095.




Long May silver $25.50/$29.00 bull call spread around $0.29.



The bulls have thin control, as Chinese data limits

GENERAL: With copper prices extending the recovery from earlier this week the market is apparently drafting support from comments from the Peoples Bank of China Gov. who promised more support for the struggling Chinese economy. Limiting copper and other base metal prices on the upside are intense Chinese government efforts to squelch surging prices with the Chinese beginning to question "international" (non-Chinese) commodity producers and traders. Obviously, the lessening of tensions involving the Ukraine is positive for physical commodities like copper, but that situation could turn without notice. In a surprise negative overnight LME copper warehouse stocks jumped by 5,150 tons breaking a 17-day pattern of declining exchange stocks. Before the large overnight jump in stocks at the LME, holdings at the exchange were at the lowest level since November 23rd of 2005. With the Chinese government concerned about inflation seeing both CPI and PPI readings come in soft in China should allow the Peoples Bank of China to be freer with support for their economy. On the other hand, we see inflation data as a signal on the state of growth in an economy and the overnight Chinese data hints at a struggling economy.


We see copper market fundamentals as generally balanced which in turn should justify further chop within a consolidation range defined as $4.60 and $4.40. Pushed into the market, we favor buying support closer to $4.40 than selling a rally to $4.60. Pushed into the market today, we see prices clawing out more hard-fought gains.

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