A Higher High for May Copper

COPPER

Seeing May copper forge a higher high this morning in the wake of another explosive increase in weekly Shanghai copper warehouse stocks is impressive and somewhat suspicious. In fact, the large inflow of 24,758 tons to Shanghai warehouse supplies is the third straight week of massive inflows which can no longer be fully blamed on the long Chinese holiday last month. However, the bull camp sees Chinese trade data earlier this week as supportive of an improving Chinese economic outlook and supportive of the improving Chinese copper demand outlook. Evidence of the improvement in sentiment toward the Chinese economy is the recovery in Chinese equity markets this week and that combines with revived hopes of lower rates in Europe and in the US. However, the “increased probability” of a US rate cut in June is not fully registering in the market with the CME Fed watch tool probability of a June rate cut increasing by just a few percentage points in the wake of an avalanche of soft US data. However, copper should continue to draw support following news that Chinese January and February copper imports increased by 2.6% with total imports of unwrought copper and copper products reaching 902,000 metric tonnes.

GOLD / SILVER

Higher all-time highs overnight are clearly justified by ongoing outside market assistance. In addition to a multiweek low in US treasury yields, the gold and silver bulls were presented with a downside extension in the dollar to the lowest levels since the middle of January. In retrospect, outside market forces for gold this week became entrenched in favor of the bull camp with a distinct pattern of US slowing evidence, a slightly dovish US Fed take away and increased expectations for a June rate cut from the ECB. However, today’s US nonfarm payroll reading could raise expectations of monetary easing in the US with a softer than expected reading. While a better-than-expected nonfarm payroll report is unlikely to erase a flurry of soft data over the last two weeks, and therefore strong payroll data could temporarily shift economic sentiment which in turn could foster temporary corrective balancing in treasury yields, the dollar and gold. On the other hand, with China adding to gold reserves for the 16th straight month last month, the trade finds a solid fundamental demand underpin for gold prices. Furthermore, gold ETF holdings continue to see minimal outflows suggesting small investors are still not rushing into catch the historic rally. Historically, Indian, and Chinese buyers have been very price sensitive and the explosion in prices is only partially offset by a strengthening in those currencies this week. Nonetheless, the magnitude of the gains in gold and silver prices this week give the bull case credibility, especially with the bull case becoming increasingly supported by outside market action.

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