Copper Market Overbought

COPPER

Obviously, the copper market is overbought with the high-volume upside extension early this week followed by a slight reduction in open interest. In our opinion, the bull bias in copper remains partially alive as Chinese economic news overnight should have sparked a noted downside extension in copper prices. In fact, with a 1% decline in Chinese Consumer Price Index readings for March, the Chinese economy continues to struggle thereby casting doubt on the idea of recovering Chinese copper demand. However, the deflationary signs in the Chinese economy have also rekindled Chinese stimulus hopes and that could countervail some of the negative bias against copper in the early trade. On the other hand, the press continues to reiterate concerns over supply disruptions which in our opinion have been parroted over and over without fresh developments lately. It should also be noted that LME copper warehouse stocks have continued to climb with Shanghai copper warehouse stocks also in a definitive build pattern. While the copper market carved out a higher high for the move yesterday, the rally failed to hold and at times the May copper contract was trading nearly 8 cents below the early Wednesday highs. In other words, the copper trade appears to have given off signs of a temporary top with the focus in the trade likely concerned about a softer than expected Chinese new loan report which continues to be delayed.

GOLD & SILVER

With the dollar this morning forging another higher high and reaching the highest level since early November, the currency impact on gold, silver, and copper remains negative. Likewise, US treasury yields remain a burden with yields reaching the highest levels since last November with another higher high overnight. While it is not clear what the direct ramifications are on gold prices, a precipitous decline in Chinese Consumer Price Index readings for March overnight suggests the Chinese economy is doing very poorly which could be a double-edged sword. On the one hand, the Fitch downgrade, falling confidence in the Chinese government and ongoing anxiety toward the Chinese property sector could prompt Chinese citizens to buy more gold as a flight to quality move, or the slowdown might reduce retail purchases of gold inside China or even reduce the Chinese central bank’s capacity to buy gold for reserves. However, a Bloomberg story overnight indicates that Chinese retail customers are buying gold ETF instruments, but we are suspicious of the ability to know that data on a real-time basis. In today’s action, the US PPI report is forecast to show a slight moderation of price pressures from the previous month, but a portion of the trade is expecting an upside surprise after yesterday’s CPI reading came in hotter than expected. With the June gold futures contract breaking a string of new all-time highs (eight straight days) yesterday, the market is facing the first definitive corrective environment since the middle of last month. In the coming session, the gold and silver bull camp will be tested again with Chinese inflation readings overnight indicative of a very slow economy and US producer price inflation data needing to be softer than expected to countervail the bearish impact even partially from the hot US CPI report yesterday.

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