After the surprise and seemingly unsubstantiated by fundamentals rally earlier this week, a setback in copper prices today is not surprising. In fact, given a significant risk off vibe flowing from global equity markets overnight, a firmer dollar and a minor uptick in treasury yields, copper demand views should weigh on prices. Furthermore, continued Covid problems in China should continue to offer stiff headwinds to the Chinese economy and pressure copper demand in the world’s largest consuming economy. However, the supply side of the equation remains very supportive of the bull case with both LME and Shanghai copper warehouse stocks falling sharply. In fact, LME copper warehouse stocks have posted another week of lower inventories of more than 10,000 tons. Perhaps even more important is a single week 29% decline in Shanghai copper warehouse supplies. Yet another supportive supply side development came from Glencore which a 14% decline in year-to-date copper output on a significant base of 770,500 tons. On the other hand, with the December copper contract yesterday (technically) carving out a minimal higher high and reaching a 3-week high, the market continues to show the capacity to discount the Chinese Covid drag. Apparently, ongoing evidence of further tightening in cash/prompt physical copper supply inside China has played a large role in discounting Chinese demand fears. However, several supply-side developments this week combined with the shift into better economic sentiment earlier in the week are likely to cushion the market against sharp downside especially with a recent net spec and fund short of 18,507 contracts.
GOLD / SILVER
With a broad-based risk off environment flowing from equities and commodities, a pulse up in the dollar and significant outflows from gold and silver ETF holdings yesterday the bias in gold and silver is clearly pointing down. With the gold market yesterday failing to post a higher high for the move in the wake of a fresh downside breakout in the dollar and a downside breakout in treasury yields, the market may have made a temporary top. On the other hand, gold and silver price action could find fresh direction this morning following the Fed’s favorite inflation gauge of personal consumption expenditures which are projected to gain 0.5%. However, would be buyers of gold and silver were likely discouraged early yesterday by a jumbo ECB rate hike and were subsequently discouraged following a noted recovery bounce in the dollar. We also see Chinese gold demand prospects deteriorating with this week’s additional lockdown orders. Given the early negative outside market influences this morning and the presence of a key US inflation report, support in December gold falls to $1641.20 and traders should see the PCE report reactions set the tone of the entire session. In other words, the theme of a December moderation of Fed hawkishness could be tested this morning.
PALLADIUM / PLATINUM
With the palladium market sliding earlier this week in the face of a major risk on day in equities and commodities and remaining pinned to the recent consolidation lows this morning the bull camp is not well attended, and the bear camp is gaining confidence. In fact, with the massive range down washout on Tuesday forged on a jump in trading volume and open interest, the market might see $2,000 as significant near-term resistance for now. Furthermore, the market has not found support from news that Impala posted a 3.5% year-over-year decline in palladium production in their first quarter. The decline in Impala palladium production is material with the total output base in the first quarter at 249,000 ounces. Going forward, we expect palladium prices to lose to platinum prices as substitution demand becomes apparent while South African PGM production sees an increase in power outages from increasing seasonal temperatures. While platinum prices have recoiled from a double high around $974 overnight, the market is probably drafting minimal support from news that Impala also saw its first quarter platinum output decline by 3.5% with an output of 330,000 ounces. Into the action today the platinum market is currently significantly overbought relative to palladium on a “short-term basis”.
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