Despite initial gains we are bearish to precious metals
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
GOLD / SILVER
While the US Dollar Index surrendered a significant portion of the overnight upward extension, it remains near contract highs, and US interest rates have broken out to the upside. A precipitous decline in a Chinese services PMI report for March overnight deflates inflationary expectations there. Therefore, the higher initial action in gold today is very impressive against outside market headwinds. In a minimally supportive development for gold and a moderately supportive development for silver, ETFs added 55,396 ounces to gold holdings yesterday, and silver holdings jumped 6.2 million ounces. For the year, gold ETF holdings are up 8.3% and silver are up 1.7%. In another modest positive demand development, the Perth Mint saw its gold coin and minted bar sales in March post a one year high. The precious metal should be undermined today by the looming release of the FOMC meeting minutes from last month. However, the carnage in Ukraine continues to spark global anger toward Russia and foment interest in even more sanctions. We see gold and silver tracking sideways to lower in consolidation patterns. If there is a breakout of the range, we would expect it to be to the downside. Given the avalanche of hawkish central banker dialogue yesterday suggesting bankers will react sooner rather than later with respect to battling inflation, it is not surprising to see gold and silver chop without direction. Specific hawkish comments from the Fed's Brainard yesterday regarding "methodical" US rate hikes ahead and an aggressive paring of the Fed balance sheet should thicken overhead resistance in the metals. In the near term, we see the top of the trading range in June gold at $1,955 with the bottom of the range projected at $1,900. Similarly, we see the top of the near-term trading range in May silver as $25.02 with the bottom of the trading range pegged at $24.02.
With negative outside market influences of rising interest rates and a strong dollar, the dip in palladium prices yesterday was justified, and the initial higher action today is very surprising. It should also be noted that US February vehicle sales earlier in the week dropped to 13.7 million annualized units from 14.4 million in January. Light vehicle sales dropped to 13.3 million annualized units from 13.97 million units previously. When one combines softer US vehicle sales patterns with the progressive lockdowns in China and very soft Chinese services PMI readings, the demand function for palladium favors the bear camp. The rally in palladium off last week's low was forged on very soft trading volume and a lower track in open interest, which suggests it was built on a suspect foundation. Near term downside targeting in June Palladium is seen at $2,150.50. To reverse the trend back to the upside might require a trade back above $2,344.50. The platinum market yesterday was even weaker than palladium, with a five-day low producing a very negative chart. With platinum consistently tracking lower in the face of the Russian debacle and Russia being the second largest producer in the world, sentiment is clearly unresponsive to bullish supply conditions. Yet another negative is a decline of 11,165 ounces in platinum ETF holdings yesterday, especially with those holdings registering a year-to-date decline of 5.1%. Near term downside targeting in July platinum is $957.40.
MARKET IDEAS: The path of least resistance is down in the precious metals with outside forces like rising interest rates and a strengthening dollar overwhelming uncertainty from Russia and expectations of inflation. However, it is possible that gold and silver will respect chart support points and extend recent sideways consolidation patterns.
GENERAL: In retrospect, the action in the copper market yesterday looks like a blowoff top! The market has received supportive supply-side developments this week from news of reduced copper production from Chile. While the prospect of lost Russian copper supply has been widely factored, this week's promise of more EU sanctions appeared to include specific references to industrial material embargoes. A negative supply-side story came from overnight forecasts of significant increases in base metals production from platinum producers for which copper is a byproducts. From a demand perspective, a significant decline in Chinese services PMI readings overnight adds to concerns of slumping Chinese demand. Import premiums into Shanghai have softened with two copper warehouses remaining closed due to lookdowns. Unfortunately for the bull camp, LME copper warehouse stocks are in a pattern of rebuilding, with stocks rising for six straight sessions, inflows in 15 of the last 22 days, and stock levels reaching the highest level since January 25. Fortunately for the bull camp copper LME warehouse stocks broke the chain of daily increases overnight with a decline of 1,050 tons overnight. Outside market negatives for copper include surging US interest rates, strength in the US dollar, and a developing trend of falling equities. Certainly, copper was presented with some positive ISM and PMI data from around the world on Tuesday, but softness in US vehicle sales and the lockdown of Shanghai keep Chinese copper demand expectations in the bear camp.
MARKET IDEAS: While we do not see copper prices falling sharply, we see the path of least resistance shifting down ahead, with demand fears from Chinese lockdowns dominating over monthly declines in copper production from Chile. With May copper at the high yesterday $0.13 above the level where the last COT positioning report was measured, the spec and fund net long in copper is likely the highest it has been since October.