Silver on Downward Track

GOLD / SILVER

While the gold and silver are trading higher this morning from a weaker dollar, both markets enter this week’s trade without an unwavering bullish fundamental force. However, at the end of last week gold at times showed signs of flight to quality buying interest off increased global economic uncertainty and that could extend into the new trading week. It is also possible that gold is drafting a measure of flight to quality buying interest from weekend events in the Ukraine war theater as mercenary forces from the Wagner Group apparently rebelled against Russia and regular Russian forces and were pushing toward Moscow before a deal ended the infighting. The leader of the Wagner group agreed to a standdown which included his safe exit to Belarus. Therefore, the status of Putin’s control is in question and a Russian Civil War would certainly create uncertainty in financial and commodity markets. It should be noted that Russia is currently the 3rd largest producer of gold with output in 2022 declining by 11.5% versus 2021. The Indian rupee has recovered this month but remains at a significantly lower value than one year ago thereby limiting the attractiveness of foreign gold imports to India. On the other hand, hedge fund managers did increase their bullish gold positioning last week but many hedge funds have been caught in the wrong position by the broad deterioration of global economic sentiment. Furthermore, the latest positioning report in gold shows an ongoing vulnerable net spec and fund long with last week’s long positioning 38% above the last 9 months’ low. The silver market also remains on a downward track on the charts and is currently out-of-favor given slackening forward physical demand views.

COPPER

With a senior Chinese economic advisor calling for swift and aggressive support for the Chinese economy, copper should see headwinds from Chinese copper demand expectations dissipate. However, if the Chinese government acts swiftly with aggressive stimulus programs targeted at infrastructure, that could quickly ignite copper buying after a 2-day high to low correction. Clearly, the copper market was significantly overbought from a $0.40 rally over the previous 5 weeks. In fact, with the aggressive rally taking place in the face of disappointing Chinese economic progress and most recently in the face of a negative shift in global economic sentiment the sharp declines was a justified healthy correction. A normal retracement of the late May early June rally was violated on Friday but then rejected at $3.811. On the other hand, the bull camp should be cheered by recent news that Chilean copper production was halted in some areas last week because of flooding and last week the markets were presented with news that many large producers will not expand production because of governmental environmental threats against operations.

PLATINUM / PALLADIUM

Weekend events in Russia (fighting between Russian hired mercenaries and regular Soviet troops) resulted in the mercenaries moving toward Moscow to kill the Russian defense minister. Apparently, the Russian army launched a missile attack on the mercenaries of the Wagner Group which resulted in the Wagner leader ordering an attack on Moscow. While not a significant threat, a Civil War within Russia would certainly put global PGM supply flow in jeopardy and perhaps that inspired some short covering action this morning. However, even with recent declines in platinum significant, the latest positioning reports showed a residual net-long large enough to project additional long liquidation selling before the market is “mostly” sold out. While palladium fundamentals are tight from a long-term perspective, near term demand views favor the bear camp with doubt on Chinese auto catalyst demand remaining in place. We are not sure what the probabilities of a Civil War in Russia are, but weekend events are a tangible threat to world palladium supply flows.

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