Significant Jump in Gold Prices

GOLD / SILVER

With a fresh lower low in the dollar early today and gold and silver prices right on yesterday’s highs, the bulls have extended their control into another trading session. In retrospect, significant rallies in gold and silver prices yesterday were the result of several bullish fundamental developments this week. Obviously, a tempering of Fed rate hike aggressiveness is a major relief to the bull camp, but the bull camp also received lift from a downside breakout in the dollar and from the downside breakout in treasury yields brought on by the Fed change. The gold and silver trade also shaped US economic data into a Goldilocks standing which tempers the magnitude of anticipated US rate hikes while keeping fears of recession in check. Therefore, today’s US monthly nonfarm payroll report will present similar volatility potential as Thursday’s data with the added volatility potential from a short-term overbought technical condition. In fact, yesterday’s significant jump in gold prices was the largest jump since the middle of the summer and has fostered chatter that the long-held downtrend in gold may have come to an end. With the significant damage in US dollar charts, we do not discount the potential for an end to the lackadaisical trade in gold over the past 2 years. Not to be left out, the March silver contract also posted very impressive chart action yesterday and, in the process, reversed several longer-term bearish technical indicators. Unfortunately for the bull camp, the rallies in gold and silver yesterday were not forged on significant increases in trading volume.

PALLADIUM / PLATINUM

We see the rally in palladium yesterday as an excessive spillover reaction to significant strength in gold and silver and remain very skeptical of the market’s capacity to string together several days of noted gains. However, palladium should garner residual support from a global deficit forecast for this year and next year from a significant Russian producer. On the other hand, palladium prices from the last COT positioning report have rallied $74 which in turn probably increases the net spec and fund, long position near to the longest spec level since March. In another negative development J.P. Morgan overnight excluded palladium from its bullish precious metal market views on gold, silver, and platinum. With US markets seemingly poised to finish the week with a “risk off” mentality (unless payrolls are not too hot and not too cold) palladium is vulnerable to a test of support down at $1885. With the platinum market consistently outperforming the palladium market recently, the dollar falling and gold and silver prices providing significant bullish leadership, the bull camp in platinum has regained its footing. However, since the last COT positioning report and into the high yesterday, the platinum market has gained $71 which probably raises the net spec and fund long position to the largest level since March. The path of least resistance is up but risk and reward of fresh longs from current levels is unattractive.

COPPER

With Shanghai copper warehouse stocks this week declining by 7.2% and LME copper warehouse stocks posting another daily decline, Shanghai stocks are at a 4-week low and LME stocks are at a 2 1/2 week low. Optimism toward signs of reduced activity restrictions in China remains the focal point in the trade with the March copper contract this morning forging a higher high and the highest price since November 15th. However, the tightening supply theme is countervailed by news that Shanghai copper futures shifted into contango for the first time in 4 months. Bloomberg overnight also indicated some physical copper supply measures inside China have recovered perhaps because of less demand from Chinese fabricators. In retrospect, the rally this week in copper prices is surprising as protests of strict Covid activity restrictions were reported in nearly 100 Chinese cities and many of their universities. While a less hawkish Fed is supportive of physical commodities, an even bigger lift for copper and physical commodities is the sharp dive in the dollar index and falling US Treasury yields. Going forward, it will be interesting to see what the weekend brings in China in terms of additional protests and or government decisions on activity restrictions. Like many other physical commodities markets, the copper market needs a continuation of risk on sentiment following the US jobs report to end the week strong.

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