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The path/trend remains down until there is a paradigm shift

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Overnight, global equities move higher with the German market posting the largest gain of 1.7%. Critical economic news included a softer than expected Australian AIG Performance of Services Index for June, lower foreign investment in Japanese bonds and stocks, impressive gains in Australian imports and exports, much weaker than expected Japanese coincident and leading economic indicators, an unchanged Swiss unemployment rate, a very sharp jump in Halifax house prices in June, softer than expected German industrial production, and a drop in Chinese foreign currency reserves. However, the biggest geopolitical development this morning is the resignation of the UK Prime Minister. The North American session will start out with the June Challenger job cuts survey followed by the June ADP employment survey, which is expected to have an increase from May's 128,000 reading. The May US international trade balance is forecast to have a mild decline from April's $87.1 monthly deficit. A weekly reading on initial jobless claims is expected to have a minimal downtick from the previous 231,000 reading. Ongoing jobless claims are forecast to have a minimal downtick from the previous 1.328 million reading. May Canadian international merchandise trade is expected to have a moderate uptick from April's monthly surplus. The June Canadian Ivey PMI is forecast to have a sizable downtick from May's 72.0 reading. St. Louis Fed President Bullard and Fed Governor Waller will speak during afternoon US trading hours.


The path of least resistance remains down, despite the massive short-term oversold technical condition in gold. Unfortunately for the bull camp, the dollar remains near contract highs, with the currency trade viewing it as an ongoing dominating force. Not surprisingly, the release of the Fed June 14-15 meeting minutes provided fresh hawkish dialogue as the committee discussed the potential for even more restrictive policies to bring inflation under control. In addition to the massive exodus of long futures and option positions yesterday, gold ETF holdings saw a 342,688-ounce reduction. Year-to-date, holdings are now up only 5.6%. Yet another sign of soft investment interest came from the Perth Mint, which indicated June gold coin and minted bar sales declined by 34% on a month over month basis. In an even more pronounced sign of negative investment interest toward precious metals, silver ETF holdings yesterday saw a massive outflow of 13 million ounces, bringing the year-to-date contraction to 5.6%. While the spec and fund net long positioning in gold (adjusted for the slide of $91 following the COT report) is likely down to its to the lowest level since April 2019, one could also say that it has only returned to the midpoint of its historic long range, which means that one technical measure has not yet registered a mostly liquidated signal. Bearish fundamentals continue to rain on the bull camp with the dollar posting fresh contract highs daily, commodity prices periodically plummeting, and India recently raising its gold import taxes. Even though gold failed to rally in sync with rising inflation expectations, it is entirely possible that it will see additional pressure from deflationary fears arising from widely held recession expectations. But despite the massive washout, open interest has held around the 500,000-contract level, as though the market has reached fundamental value and has extracted large percentage of weak handed longs from the equation. Unfortunately for the bull camp, macroeconomic/overtightening views will likely pressure gold into the July 13 US CPI release, as that could be the official peak in classic inflation measures and possibly the peak in over tightening expectations. The next critical support point in August gold is $1,729.80, followed by a more extreme low down at $1,710.20.


Despite a price forecast reduction for palladium from Bank of America, the market continues to grind higher. Recent gains have also been carved out in the face of sagging commodity demand prospects and an ongoing lack of interest in ETF holdings. While the threat against supply from Russia and South Africa have not been key features, we suspect those issues are contributing to the grind higher in prices. With US auto sales in June posting the second lowest reading of the year, a fresh infection threat in China, and global recession projections filling the headlines, we are doubtful that demand expectations are sparking buyers. Nonetheless, the trend is up, with uptrend channel support line today at $1,878.75 in September Palladium and a technical failure seen if there is a trade below $1,856. Unlike palladium, platinum has rushed to factor in a plummeting of demand in the event of a recession. The market should be undermined by softness in recent US vehicle sales and outflows from platinum ETF holdings. Yesterday platinum ETF holdings declined 6,800 ounces. They are currently 7.5% lower on the year. We see unreliable support in October Platinum today at $842.80.

MARKET IDEAS: We are hard-pressed to offer a credible fundamental argument for an end to the selling in gold, silver, and platinum. Instead, many fundamentals look to increase selling pressure on gold directly ahead. Even the technical condition favors the bear camp, with the spec and fund net long in gold likely nearly 200,000 contracts, which is near the mid-point of the range of historic long positioning. Unfortunately for the bull camp, the massively oversold technical signals might only result in a halt of aggressive declines as opposed to a bounce, as a credible fundamental reason to rally is not on our radar.


Massively oversold but lacking fundamental reasons to bounce.

Not surprisingly, analysts have revised their copper price forecasts downward, in a sign that the market is embracing the idea that a recession as inevitable. The potential for a deep recession should not be ruled out if near-term US price measures remain hot and/or the mass testing in Shanghai results in another lockdown of the world's third largest city. Even though the trade will likely react to upcoming US jobs news, the overwhelming force in copper will rotate between the Shanghai infection situation and the big picture macroeconomic vibe flowing from financial futures. With a major range down extension extending the six-day break to as much as $0.60 and the September contract aggressively rejecting the early Wednesday decline with a midday bounce of $0.15, the market might have forged a temporary bottom. However, the prospect of fresh lockdowns in China should discourage aggressive bottom picking, even though the trade should be supported following news that Peruvian copper output in May declined 11.2%. Unfortunately for the bull camp, demand destruction fears are currently given more credence than evidence of lost supply. Therefore, China's plan to test 25 million people in three days becomes a very important market fundamental. Even if the number of infections is statistically low, China is likely to maintain its zero-Covid tolerance standards.

MARKET IDEAS: With China in the middle of a massive effort to test 25 million people in Shanghai by Friday, traders should expect significant volatility in the coming two sessions. However, we give the edge to the bear camp, as it is likely that testing 25 million people will result in more infections than China is willing to accept to avoid lockdowns in some areas of the city. While not as big a negative impact as the Chinese infection situation, signs of softening in US jobs should add a small measure of demand related selling. The market appears to have found some measure of support at the $3.40 level and could hold that level if equities maintain a positive track today.

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