Gold Market Sensitive To Dollar

GOLD / SILVER

Surprisingly, the gold market has remained lower this morning despite a softer than expected set of inflation readings from the UK. In our opinion, the data was not enough to discourage the Bank of England from hiking rates tomorrow, but the UK economy has created some doubt. However, recently the gold market has been very sensitive to action in the dollar and with gold trading lower today with a setback in the dollar, the bull camp has stepped back. Certainly, the aggressive recovery in the dollar yesterday has rattled some would-be buyers, especially if the US Fed surprises and decides to hike today. Investors remain bearish toward gold as ETF gold holdings were reduced for 13th straight session yesterday bringing the year-to-date decline to 5.2%. While not likely the primary reason behind the silver market’s positive divergence with gold this morning, silver ETF holdings saw a large inflow yesterday of over 4 million ounces. However, as indicated yesterday, we are suspicious of market sentiment so conclusively on board with the Fed’s decision to pause, especially after the barrage of foreign central bank rate hikes. On the other hand, the US Federal Reserve appears to have confidence they can manage inflation and keep the economy moving forward. While the fresh signs of improved demand from the jump in Swiss transfers of gold could be a one off, it is the first solid classic bullish fundamental development for gold in some time. Nonetheless, we detect a lack of bullish resiliency in gold and other than the increase in silver ETF holdings yesterday the rally in silver this morning appears to be without definitive fundamental justification.

PLATINUM / PALLADIUM

The path of least resistance is up in platinum with the recent pattern of higher highs and higher lows combined with a large 12,000-ounce plus single day inflow to platinum ETF holdings providing the bull camp with an edge today. However, the source of the rally in platinum remains this month elusive unless the trade sees Chinese export restrictions on strategic metals as a possible supply threat. In fact, China did not export any geranium and gallium last month because of export restrictions. Despite the “potential” supply threat from China most fundamental evidence favors the bear camp with demand threatened by disappointing US housing starts and the likely expansion of the United Auto Workers strike against the big 3 automakers. Perhaps traders are speculating on renewed production problems in South Africa as temperatures rise into the hot season with mining facilities likely to be confronted with rolling blackouts during peak demand periods.

COPPER

We are surprised the copper market is not sharply lower as LME copper warehouse stocks overnight exploded with an inflow of 6,100 tons and the Chinese central bank did not cut interest rates. However, the bank was not expected to cut interest rates and it is possible that evidence the Chinese are restricting exports of certain strategic metals could be providing indirect support for copper. On the other hand, the Chinese copper industry has been warned of using too much imported materials and that should be seen as a threat against future Chinese raw copper imports. However, Chinese copper output hit a record last month as smelters expanded their activities. Expanded smelter activity in a controlled economy could be a sign of future government expectations of increased demand. We doubt the copper market is holding up because of anticipation of the US Fed pause but that is already widely anticipated and therefore we leave the path of least resistance pointing down. At least in today’s action, we see the central bank influences as negative with the BOE likely to raise rates tomorrow thereby applying fresh pressure to copper.

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