Written Commentary
COPPER
In retrospect, the copper market has displayed significant two-sided volatility recently as the outlook for the Chinese economy has waffled between concerning and slightly hopeful. However, the global economic outlook is now softening and therefore economic signals from China have become even more important in determining daily copper prices. Unfortunately for the bull camp, Bloomberg overnight indicated Chinese activity slowed last month (from high-frequency data) with one measure registering below pre-Covid trends. In our opinion, the Chinese economy is very vulnerable because of a lingering threat of financial contagion from real estate. Nonetheless, there are several supply threats from Central and South America lingering and recent Chinese copper import readings have been supportive. Furthermore, the technical picture is positive with a series of higher lows and higher highs unfolding since late October and the copper market continuing to hold a net spec and fund short.
GOLD & SILVER
Given the fundamental and technical events of the last two weeks, the trend in gold and silver has shifted back in favor of the bear camp. From a technical perspective, the massive rally last week exhibited a classic blowoff top and reversal with confirmation from an explosion in trading volume and a subsequent decline in open interest. From a fundamental perspective, the mainstay of the bull case in precious metal markets since October has been a weakening dollar which now appears to have recovered especially with the market’s decision that despite signs of US slowing, the US will likely hold up better than most in the face of the lagged headwinds from the unprecedented rate hike cycle. However, the upward track in the dollar does not look to be as aggressive as was seen last summer and it is possible that falling implied treasury yields will help cushion gold and silver against $ liquidation pressure. Looking ahead to this week’s economic slate, the trade will be presented with another round of US treasury auctions which have become more volatile because of their expanding size. It should be noted that the week ahead will also bring US CPI and PPI readings which will add considerably to (or subtract from) the prospects of a US rate cut early next year. Fortunately for the bull camp, this week’s US CPI and PPI readings are expected to signal moderating inflation with expectations for both reports calling for a gain of only 0.1%! In conclusion, the initial path of least resistance is down with technical stop loss selling momentum likely to control until after the US CPI report on Tuesday morning. The silver market is presented with nearly the same bearish fundamental and technical picture as gold, with added fundamental bearishness seen from the threat of sagging physical demand because of sagging global industrial activity. Like gold, the silver market is also overbought in spec and fund positioning, with the latest COT report registering the biggest net spec long since July.
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