Sharp Rebound in Copper Prices

COPPER

Not surprisingly, copper prices have rebounded sharply following a somewhat surprising Chinese rate cut and more importantly because of looming support for China’s struggling property sector. While a weaker dollar adds to the bull case, a very significant single day outflow of 6,100 tons from LME copper warehouses adds a fresh element of support from the supply-side of the equation. Even though copper prices have responded aggressively to Chinese moves overnight, specific stimulus and support for the Chinese property sector will be needed to sharply extend the late May and early June rally. Given the washout and aggressive recovery overnight, copper is likely to benefit from stop loss buying from a moderately large net spec and fund short positioning reading from last week’s COT report. While we expect copper to benefit from a US Fed pause Wednesday, that bullish force is heavily baked into the cake already. However, now that the July copper contract has regained the bottom of the December through early May consolidation zone, the bull camp no longer argue that copper prices are “cheap.”

GOLD / SILVER

With another new low for the move in the dollar, a Chinese interest rate cut, and market chatter anticipating further stimulus/support for the Chinese economy, the gains in gold and silver are undersized in the early going. Apparently, the Chinese government is considering a broad stimulus package in addition to targeted support for its beleaguered property sector and that should help shore up the economic outlook for the world’s largest gold consuming country. In today’s action the markets have been presented with inflation readings from Germany and Spain both showing signs inflation is abating. Therefore, the big event of the day will be the US CPI report and a post above +0.2% could result in a temporary ripple of concern of a surprise US rate hike Wednesday afternoon. On the other hand, with gold falling sharply throughout May and tracking sideways so far in June, it does not appear the market sees a pause by the Fed as a particularly bullish force. While the list is not complete yet, the IMF indicated that Uzbekistan, Kazakhstan, and Australian central banks reduced their gold holdings during the month of May. However, news that Russia raised its gold holdings by 3.1 tonnes in May is suspect and immaterial in the current trade. In an interesting development European media outlet “The Guardian” indicated a real estate developer in China is offering gold bars to attract property buyers. Historically lower inflation has been seen as bearish by the gold and silver trade, but the ultimate reaction in gold and silver to today’s US CPI will be indirect from the reaction in the Dollar. In the end, the downside breakout in the dollar, a Chinese rate cut, Chinese stimulus and the likelihood of a Fed pause should leave the bias up.

PLATINUM / PALLADIUM

Even though platinum has not posted a fresh new low for the move early on, the bias is down despite several supportive big picture economic developments. The most surprising forces discounted by the platinum trade early today is an interest rate cut in China and promises of targeted stimulus for their property sector. However, the rate cut and promises of stimulus in China were partially nullified by a smaller than expected recovery in Chinese new loans. Another but less significant discounted bullish force is a downside breakout in the dollar. While the September palladium posted another wide trading range to start the week (nearly replicating Friday’s action) the trade aggressively rejected levels just above last week’s low of $1,293, which should make that level key support. Given the likelihood that a new record net spec and fund short is already in place a quasi-side double low from yesterday could be a temporary but unreliable interim low.

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