Written Commentary
PRECIOUS METALS
Gold: December gold contracts continued to feel modest pressure in the wake of Warsh’s speech and July’s PCE data. Warsh moderated his views significantly more than his previous comments, leading the market to unwind the recent increase in yields that was driven by concerns about his credibility. Warsh said that the Fed’s 2% PCE target is a “firm, fixed target”. He specifically noted that the target refers to PCE inflation, which is important because there’s been some speculation that Warsh would try to change the inflation index targeted by the Fed. Warsh’s remarks over the economy were hawkish, implying that underlying inflation remains too high and that the Fed will have to act if it does not ease, comments in line with other Fed Governors recently. His remarks also saw the dollar and expectations of a September rate hike rise materially. Markets are pricing a 62% chance of a hike next month and see 37 bps of total tightening by year end. Ahead of his comments, the market saw a 36% chance of a hike in September and were barley priced for a move higher by year-end. Data last week also fell into the hawks camp, with July’s PCE print, showing both headline and core PCE readings rise, while second-estimate GDP figures revised private domestic final demand higher to 4.2%, real GDI up to 2.2%, and quarterly PCE also revised higher. The report largely reflects that the economy retains enough domestic-demand resilience to keep inflation risks elevated.
Silver: September contracts are down 0.8% to $66.42.
BASE METALS
Copper: Copper prices in the US are up 0.62% $6.60, while LME trade is quiet amid the holiday in the UK. The copper story has been little changed over the last week as fundamentals of tight LME-warehouse stocks and ongoing supply worries are still in place while a materially stronger dollar in the wake of Warsh’s Jackson Hole speech and last week’s PCE data have led to some profit-taking. Still, the move higher today suggests focus remains on the supply story. Low LME inventories and ongoing supply worries are likely to continue to underpin prices, while shipments to the US amid speculation over potential US tariffs is likely to keep available copper in LME warehouses low. LME stocks saw a significant decline of nearly 50% in between June and mid-August, though have since rebounded modestly. That rebound has lowered the premium of the cash contract to the three-month forward from $545 in mid-August to around $70 as of last Friday. However, inventory remains low and around 55% of the total metal in the LME system are on cancelled warrants.
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