Downside Reversal in Gold

GOLD / SILVER

With reports of buyers stepping forward for some assets of the Silicon Valley Bank and a regional Fed Pres. suggesting the US economy is drawing closer to recession because of the bank sector turbulence, a measure of corrective action in gold and silver is justified. However, a demand underpin for prices was seen overnight following reports that Chinese February imports of gold via Hong Kong rose to 64.8 tons versus only 22.2 tons in January. In a suspect but supportive development at the end of last week, the Russian central bank also indicated it has added 1 million ounces of gold to its reserves since the beginning of the Ukraine war. Furthermore, according to several different global entities, total Russian energy receipts continue to be robust, and financing of the war will continue. However, some analysts suggest the Russians may have switched a large portion of their dollar and euro holdings into the Chinese currency and that may justify some of the dollar weakness over the last several months. Clearly, a moderation of global angst over bank sector issues has moderated and without a fresh bank victim or a rumor of a fresh victim we expect some flight to quality premium to drain from both gold and silver prices. At least to start this week the markets do not appear to be overly interested in news of Russia potentially moving tactical nuclear weapons into Belarus nor is the trade sensitive to the intense fighting between Ukraine and Russia in the East. While June gold failed to hold a minimal upside breakout on Friday, the market was obviously overbought from a 2-day surge of $70, and the new high for the move was forged on strong trading volume and an uptick in open interest and that makes the downside reversal this morning significant and likely to extend.

PALLADIUM / PLATINUM

In addition to negative divergence with gold last week and periodic drawdowns in platinum ETF holdings, the charts have also been freshly damaged in platinum to start the new trading week. Furthermore, the platinum market has consistently forged lower highs and lower lows over the last several weeks and posted a significant jump in trading volume on last Friday’s downside failure. Apparently, the trade has quickly discounted the potential for a reduction in output from a South African miner who announced last week they would skip their usual quarterly dividend. While the platinum market was not particularly benefiting from the recent strength in gold, corrective action in gold today is likely to add a measure of selling pressure in the platinum trade today. Clearly, platinum is tracking physical commodity fundamentals instead of flight to quality cues and apparently anxiety toward the global banking sector has given way to an increase in recession fears today. Going forward, we suspect the platinum market will continue to chop sideways with a slightly bearish tilt. Like the platinum market, the palladium market posted negative chart action on Friday and has not shown positive traction from strength in gold or from the ebb and flow of flight to quality market action.

COPPER

Despite tightening supply signals last week from Shanghai copper warehouse stock readings and evidence of supply drawdowns in Chinese private company industrial storage facilities, the copper trade is facing a bearish macroeconomic environment to start the new trading week. However, US and Chinese relations remain very tense with Chinese officials at a global conference in China today reiterating their objective of an “open China”. However, it was reported that 5 Chinese employees of a US law firm were reportedly detained in Beijing today prompting suspicion of the open China policy. However, reports last week indicated spot discounts in Shandong contracted sharply because of soft demand but reportedly recovered sharply on Friday. Furthermore, copper scrap prices also fell sharply early last week before rebounding in a possible sign of bargain hunting buying by Chinese interests. Obviously, Western demand prospects are moderating if not deteriorating, while Chinese copper demand expectations are generally positive but are in constant need of verification. Unfortunately for the bull camp the next critical Chinese scheduled data point is manufacturing PMI readings for March due out early Friday morning Asian time. On the other hand, the copper market could become technically sold-out quickly with the latest positioning report showing the market net short 10,571 contracts.

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