Written Commentary
GOLD / SILVER
With the dollar index posting a lower low early today the trade continues to anticipate a jumbo rate hike from the ECB and with gold and silver prices trading marginally lower early on fear of higher interest rates in Europe has been discounted in favor of weaker dollar action from an ECB hike. In retrospect, the Bank of Canada with a 50-basis point rate hike surprised the markets with a smaller adjustment than expected and that should reduce negative reactions to possible rate hikes by the Bank of Japan and the European Central Bank directly ahead. Obviously, a tempering of recession fears early this week allowed physical commodities like gold and silver to spring off deflated pricing. In a surprise development, gold ETF holdings saw a moderately large inflow yesterday of 24,430 ounces, but that positive news was offset by a 1-million-ounce outflow from silver ETF holdings. With the net spec and fund long in gold last week nearly 300,000 contracts lower than the 2022 high, and the attempt to consolidate over the past 30 days, we think gold has found a fundamental low. With silver ETF holdings in general beginning to post a pattern of daily inflows, consistent positive leadership from gold and spillover lift from lower treasury yields and a softer dollar could see silver post a near term grind above $20.00.
PALLADIUM / PLATINUM
While the PGM markets surprised the trade yesterday with recovery action a series of foreign central bank rate hikes, combined with additional lockdowns in China and the potential for evidence of softening car sales in today’s US GDP and durable goods reports, should thicken overhead resistance in palladium and platinum. Apparently, slumping demand prospects from auto and housing sectors was discounted yesterday in favor of lower supply and improving global economic sentiment. However, with Goldman seeing significant downside risk in palladium prices, an 11% increase in palladium production by Russian Norilsk nickel and new Covid lockdowns in China, the overall path of least resistance favors the bear camp in palladium. However, the very sharp range up move in January platinum back to the highest level since August 15th yesterday suggests that the fundamental condition in platinum is different than the fundamental condition in palladium. As in palladium, the platinum market should draft residual support from news that Amplats saw its 3rd quarter platinum production drop by 7.7% versus year ago levels. The company warned that production might not meet full year projections if power outages continue. In a very minor bearish development platinum ETF holdings yesterday declined by 1,511 ounces and extended the trend of investment outflows. With the last platinum COT positioning report long below the lowest levels since the end of April, the platinum market should retain technical speculative buying capacity.
COPPER
While part of the noted strength in copper prices yesterday was justified by very positive influences from outside markets, we are hard-pressed to justify a rally of $0.13. We are skeptical of the aggressive rally in copper prices yesterday because the Chinese government announced additional lockdowns in several different geographic areas. However, supply issues might have been the primary source of buying interest yesterday as the trade continues to see extremely tight copper inventories inside China, with Guangdong inventory falling for 6 straight days and creating concern for delivery availability. Furthermore, daily LME copper warehouse stocks have continued to decline at a moderately significant rate which magnifies the importance of the tightness inside China. In other words, supply is currently trumping demand fears. Perhaps the smaller than expected Bank of Canada rate hike yesterday and fresh supply threats from Peru from community protests planned for next week sparked short covering of a portion of a moderately large net spec and fund short positioning.
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