Written Commentary
PRECIOUS METALS
Gold: December gold contracts moved higher overnight breaking above its 200-day MA for the first time since early June. The Treasury Department’s announcement that it will double the size of its liquidity-support buyback operations for longer-dated debt has offered strong tailwinds to gold. Firstly, the move is bearish for the dollar as the move to artificially lower rates and risk premium results in currency depreciation because if bond prices cannot move lower, the foreign exchange price of owning US debt has to adjust via currency depreciation in the dollar. Additionally, the move to increase buybacks highlights that the administration is unlikely to address the underlying problem, being the large deficit and rising debt. The move has also reinvigorated the debasement trade, treating the metal as protection against rising debt levels and persistent inflation.
Meanwhile, the latest FOMC minutes indicated meaningful concern about inflation, with many participants assessing that additional policy tightening could be warranted if inflation fails to decline. However, most participants expected inflation to slow in the second half of the year as energy and tariff effects faded, but saw risks as skewed upward. Markets are pricing a 35% chance of a hike next month and see 25 bps of total tightening by year end. With no end to the US-Iran impasse in sight, oil supply from the Middle East will remain disrupted, keeping inflationary risks skewed upward. The risk backdrop is little changed with oil and yields still elevated and a US-Iran deal unlikely in the near term, keeping risk premium and inflationary worries elevated.
Silver: September contracts are up 2.45% to $69.74.
BASE METALS
Copper: Copper prices on the LME rebounded on a weaker dollar, despite rising inventory in the LME system. Benchmark three-month copper on the LME was up 1.4% at $14,233, while COMEX prices rose 1.78% to $6.58. Wednesday’s Treasury department announcement helped lower the dollar, supportive of copper. The premium of the of the cash contract over the three-month forward slid to $55 from Monday’s $436 as more copper has become available for immediate delivery. LME stocks data has shown massive inflows over the past week, bringing stocks up over 75% the past 10 days, helping ease tightness in the system. Meanwhile, the copper premium in China has risen 7% to $93, despite copper inventories on the SHFE rising 28% this week. Vice Finance Minister Min said that more fiscal spending in China will be directed at households and consumption, adding to hopes that domestic demand can rebound. Still, results will take time to be clarified and the current domestic consumption picture remains weak. Elsewhere, Reuters reports that the US and Canada are close to agreeing to a trade deal that could reduce tariffs on Canadian metal.
Zinc: Zinc rose 1.7% to $3,823, a four-year high.
Aluminum: Aluminum rose 1.2% to $3,242.
Tin: Tin advanced 0.9% to $56,300.
Lead: Lead fell 0.3% to $1,897.
Nickel: Nickel climbed 0.6% to $16,975.
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