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Fear of recession, higher dollar, and rising rates all bearish

Commentaries & Views

OUTSIDE MARKET DEVELOPMENTS: Global equity markets were mostly lower last night, with the exceptions being the All Ordinaries and the TOPIX Index, which traded fractionally higher. Other news released overnight included softer than expected New Zealand June exports, stronger New Zealand imports for June, a negative merchandise trade balance from Japan, stronger Japanese imports and exports for June, a significant drop in national Australia Bank's business confidence reading, a notable jump in New Zealand credit card spending, a large jump in GBP public sector net borrowing, as-expected French business climate in manufacturing readings for July, and lower auction yields for Spanish 5-year Bonds. The North American session will start out with weekly initial and ongoing claims data with expectations calling for an increase in continuing claims and a decline in initial claims. The markets will also be presented with a Philadelphia Fed manufacturing survey for July, which is expected to improve on last month.


The gold and silver markets, like many other commodities, are falling victim to the escalating fear of global recession this morning. It is also likely that a minimally higher high in the dollar is providing added selling incentive. Yet another moderately negative development was a 16th straight day of gold ETF outflows, with another, significant, 209,720-ounce outflow overnight. Even more negative was a massive, 8.3-million-ounce outflow from silver ETFs, pushing total holdings down 8.1% for the year so far. Even the technical picture has shifted bearish, with the October gold contract busting down through psychological support at $1,700. With Russia returning gas flow through a critical pipeline this morning, a sharp acceleration of inflation in Europe from gas prices is less likely, especially if the ECB this morning raises interest rates by 50 basis points as expected. The gold market is also likely to remain under pressure after predictions from India of a significant contraction in gold imports due to the 5% increase in import duties that are expected to reduce retail jeweler profit margins. Near record lows in the Indian rupee should add further pressure on Indian gold demand. As if there were not enough bearish factors in place, the gold market also failed to benefit from efforts by EU diplomats to tighten the restrictions on Russian gold exports. Without a "all clear” on the global economic front, which is unlikely, we expect gold to continue to slide and drag silver with it.


While palladium prices market remains within their recent consolidation zone, platinum has a moderate failure on its charts. We expect both markets to be pulled lower by a resumption of recession fears. However, it remains extremely difficult to define the focus of the PGM trade, as fundamental news flow has dried up, and the markets have no fear of disrupted supply from the world's largest PGM producer. Demand signals from the auto sector are delayed significantly, and we suspect large auto manufacturers have piled in strategic PGM supply following the explosion in prices in the first quarter. It is also difficult to predict further downside action in prices ahead given the record spec and fund net short positioning in place. While palladium ETF supplies have not contracted as much as platinum, both metals continued to see a prevailing pattern of disinvestment overnight. As of the most recent data, platinum ETF holdings fell a whopping 10,717 ounces on Tuesday and another 2,657 on Wednesday, leaving holdings down 9.7% for the year so far. Palladium ETF holdings declined a minimal 573 ounces yesterday, but they remain 13% lower year-to-date. We continue to be less bearish toward palladium than platinum, as it has built a consolidation on the charts above $1835 and did not forge a significant rally like platinum did (up $66) off last week's lows.

MARKET IDEAS: Many bearish fundamentals remain entrenched, with added pressure today possible if the ECB raises rates by 50 basis points. We expect the dollar to regain its footing and expect to see further aggressive liquidation of gold and silver ETF holdings. About the only positive for gold prices is the rapid reduction in the net spec and fund long positioning. However, the net long was still as high as 136,589 contracts in the recent report, which suggests that the market might need to liquidate an additional 60,000 additional to become "mostly liquidated."


The bias is down; a return to 2022 lows ahead.

With the copper market yesterday posting a gain of $0.24 off last week's low, macroeconomic sentiment very negative, signs of a strengthening dollar, and generally disappointing US data from the housing sector, the bear camp has plenty of ammunition today. Supportive overnight news included a jump in June Chinese refined copper output of 10.3% and a decline in LME copper warehouse stocks of 2,025 tonnes. While the recovery in copper prices from last week's low has been partially the result of three days of risk-on equity market sentiment, reports that China will reopen some casinos this weekend and talk of reduced production from copper mining companies (from labor and profit margin pressures) also contributed to the "bounce." We purposely use the term "bounce," as demand fears from China continue to surface from headlines detailing manufacturing layoffs. The reopening of casinos in Macao does not directly improve Chinese copper demand conditions, especially with growing fears of widespread lockdowns in key Chinese manufacturing cities this week. The large spec and fund net short in copper appears ti gave brought in some short covering and perhaps stop loss buying by those who had sold the market below the $3.25 level. On the other hand, other base metal prices have recovered somewhat, and Polish copper mining company KGHM yesterday posted an 11% reduction in production and a 3% decline in sales for the month of June.

MARKET IDEAS: Prospects for a shift back into an optimistic global economic environment remain very low. We see Chinese copper demand deteriorating, with a declining currency signaling a lack of confidence in that nation’s economy. Pushed into the market, we would be sellers, but we would also advise getting short closer to $3.30 than to $3.25.

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