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Inflation evidence mounts. but metals ultimately fear the Fed

Commentaries & Views


Despite a stronger dollar and modest declines in crude oil prices, the gold market sits near its highest level since March 14 in the early going today. The bull camp is helped by another round of international inflation readings overnight, with evidence from New Zealand, Great Britain, and Spain. We suspect that metals are partially undermined by soft Chinese import and export data, as that insinuates a soft economic foundation. As indicated yesterday, we see the gold and silver gains this week as pure inflationary moves, which is impressive considering they have been forged in the face of a litany of hawkish US Federal Reserve statements. The US Federal Reserve members are generally of a mind that two 50-basis-point rate hikes are needed directly ahead. Therefore, it is a delicate balance for the gold and silver bulls to see inflation psychology ramp up at the same time the Fed is aggressively ramping up its resolve to head it off. Some economists, fund managers, and Fed members saw the CPI core rate reading yesterday as a sign that inflation might be topping out. In another fresh negative overnight, India’s March gold imports fell sharply on a year-over-year basis, but that decline is outsized by the strong, pent-up bounce in demand last year. While not a front burner issue early this week, Russian military activity is picking up, with reports of a more aggressive commander stepping in to lead their forces. With gold and silver prices posting gains in the face of rising interest rates, stronger dollar action, and significant weakness in energy prices, it is possible that buying is inspired by classic inflation anticipation. However, with follow-through gains today in the face of dollar strength, the bull camp appears to have more than one argument supporting their case. In what might be an indirect benefit to gold and silver bulls, yesterday's Treasury Note auction demand was very poor despite yields in the vicinity of 3-year highs. From a short-term technical perspective, June Gold has carved out an impressive 5-day pattern of higher lows and higher highs, leaving short-term trend signals pointing upward. Similarly, the May silver contract has also put together a very constructive chart pattern over the past five trading sessions with the setup pointing to a trade above $26.00.


With the National Union of Mineworkers and the AMCU union expected to join forces to secure higher wages and better fringe benefits, South African gold, platinum, and palladium production is threatened, and prices should be underpinned. Apparently 35,000 workers are involved, with the unions seeking a 5% raise. So far, Sibanye-Stillwater indicates they have not received a formal notice to strike at their platinum mines. Unfortunately for the bull camp, last week's late rally and Monday's follow-through were forged on extremely low trading volume, suggesting the bull camp currently lacks impetus. Key support in June Palladium is seen at $2,305 with a major support/failure point seen at $2,226. While platinum did not see support from the potential for strikes at Sibanye-Stillwater platinum mining facilities in South Africa, the market remains just above solid support of $950 on the charts, and if workers lay down their tools, it could result in a rally toward $1,050.

MARKET IDEAS: While we could see gold and silver buying come alive with sustained gains off inflationary expectations, we remain skeptical of that possibility given the rising chorus of Hawkish Fed statements. Inflation data released this week have already produced hawkish Federal Reserve comments, and the trade has yet to encounter PPI readings. However, even without knowledge of the PPI result, trade expectations are now projecting sequential 50-basis point US hikes. Therefore, we suggest traders allow for a return to $2,000 in June gold and a return above $26.10 in May silver to purchase bear put spreads.


Suspect outlook as Chinese news points to slowing

Chinese daily infection counts remain above 24,000 (average daily), LME copper warehouse stocks continue to climb (+2,650 tons overnight), and Chinese March copper imports (released overnight) were reported to be down 8.8% from year ago levels, and that gives the bear camp a load of ammunition. In addition, Chinese import and export data came in softer than expected, which should dampen copper consumption projections. But despite the surging daily infection rate in China, deaths from Covid have not picked up markedly, and most infections are asymptomatic. Some bulls will suggest that a slight lessening of lockdown restrictions in Shanghai offsets fresh lockdown measures in other cities. In a surprise bullish development, China posted a surge in March crude oil imports, which provides hope that their economy is still holding together. From a technical perspective, May Copper yesterday forged a quasi-double low around $4.6240, but we view that support as suspect.

MARKET IDEAS: Copper has consistently rejected spike down moves since mid-December, but Chinese infection counts look to keep headwinds in place for their economy, and LME copper stocks continue to build, thereby reducing tight supply arguments. Given the $0.25 correction over the last five days, we think the market found some value at this week's low.

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