Temporary corrective action
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OUTSIDE MARKET DEVELOPMENTS: Global equity markets were mostly higher overnight with the exceptions the markets in Asia. economic news of importance released overnight included disappointing Australian Western Pacific consumer confidence for March, very disappointing Japanese GDP, much hotter than expected Chinese consumer and producer prices, a dip in Japanese machine-tool orders, a smaller than expected nonfarm payroll gain in France, and softer than expected industrial output for Italy in the month of January. The North American session will start out with a weekly private survey of mortgage applications, followed by the January job openings and labor turnover (JOLTS) survey which is expected to have a minimal downtick from December's 10.925 million reading. Earnings announcements will include Campbell Soup before the Wall Street opening.
GOLD / SILVER
A noted correction in gold and silver prices this morning is not surprising considering yesterday's gains. However, there is a slight letdown in flight to quality interest following reports that Russia will allow humanitarian corridors for refugees to leave the Ukraine. Some buyers of gold think Russia will see a financial collapse as official and unofficial sanctions pile up, but news that China will continue to buy energies from Russia pushes that likelihood back. According to one Russian gold mining company, they are being supported by the Russian central bank decision to resume gold purchases in the domestic market. Seeing the Russian central bank buy domestic gold production without an international outlet to sell the gold amounts to direct support of the mining industry at the expense of the national treasury. Cushioning the gold market today is weakness in the dollar, which this morning was nearly 100 points below the Monday high.
With gold ETF holdings rising for a seventh straight session yesterday and those holdings up 5% year-to-date, investors are beginning to recognize the potential in gold and silver. Investors might be cheered by extremely hot Chinese February CPI readings which met expectations but are still a sign of hot inflation at +0.9%. A further sign of Chinese inflation was seen from their PPI, which rose 8.8% versus an expectation of +8.6%. Like several other markets, gold and silver saw significant range-up action and then fell back significantly from those highs in a fashion that speaks of a temporary top. Obviously, gold, and silver have become linked to the ebb and flow of crude oil prices, and part of the setback from the highs yesterday coincided with crude oil’s $10 setback from its the highs.
Gold should derive support going forward from Congressional efforts to make it more difficult for Russia to access its gold reserves. The bull camp could see flight to quality buying return, but in the near term, we see inflation news as the primary force. Fortunately for the bull camp, the aggressive range up action this week has been forged on strong volume and rising open interest.
The silver market has also forged its gains on increased trading volume and higher open interest. Some technical analysts are suggesting that the chart in silver has become more powerful than the chart in gold. With the precious metals trade seemingly shifting from a flight to quality focus to inflation, the daily ETF inflow could become more important. But while the trend is up, the easy money has probably been made in the long side of gold and silver for now.
MARKET IDEAS: According to several market sources, the metals markets are now being lifted by inflationary prospects in addition to flight to quality concerns. However, the flight to quality component is mostly missing today with equities higher, the dollar lower, Treasuries lower and the Russians allowing exit court corridors for Ukrainians wishing to leave the country. We suspect ongoing strength in the dollar will hold back upcoming gains, and because the huge rallies in gold and silver yesterday failed to hold, a temporary corrective setback would not be surprising. With the US and UK implementing embargoes against Russian oil imports, it is possible that Putin will respond with action that could add fuel to the flight to quality fire. While we have predicted significant two-sided volatility for the past two weeks, yesterday's massive trading ranges could signal even more volatility ahead. We see a critical pivot point in April Gold today at the midpoint of yesterday's range at $2,016. Similarly, we see a key pivot point in May Silver at the midpoint of yesterday's wide range at $26.37.