Written Commentary
GOLD & SILVER
With the gold market over the last 72 hours settling within a range bound by $2350 and $2300, it is possible that some form of value has been found ahead of what is likely to be a key fork in the road for prices. While the February to April rallies in gold and silver were not fueled by definitive inflows to ETF holdings, both gold and silver holdings continue to decline in a sign that small investors have not been enticed by the second half of April setback. It should be noted that daily silver ETF holdings have been exhibiting significant volatility with holdings virtually unchanged on the year. Obviously, the markets are likely to see a financial market chain reaction following today’s PCE data even though sentiment in the markets has already pushed back timing and reduced the number of expected rate hikes this year. Therefore, a simple downtick in PCE could shift the pendulum back in favor of less restrictive US monetary policy, while a steady or higher reading probably gives rise to views the US will not cut rates this year. Perhaps the core rate or the year-over-year rate will be important today as the trade is hyper focused on predicting the Fed. In a longer-term supportive development, the World Gold Council chief market strategist for Europe and Asia thinks the gold market has delinked from the dollar and is benefiting from recovering demand in China, India, and Turkey. While we see value at $2,300, today’s US scheduled data is very important and a return to volatility is possible today.
COPPER
While not a realistic component of this morning’s strong recovery, BlackRock indicates the hurdle rate to consider new copper mine projects is $12,000 a ton, which would be 20% higher than current London prices. In addition to soaring costs for basic inputs, extensive environmental restrictions, long holding periods before returns become positive, and in some cases in Central and South America there is the threat of government seizure and shutdowns from local protests. Nonetheless, we remain skeptical of the bull case in copper, but strong US durable goods readings yesterday and renewed efforts to block Russian base metal exports with sanctions should help the bull camp maintain control of the market. Even though we hold out little hope sanctions against Russia will be effective, the threat of removing or delaying that supply flow in a tight market would likely result in another upside breakout in prices.
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