While the charts remain bearish in copper, there are countervailing issues flowing from the world’s largest copper consumer China. On the one hand, supply/inventories inside China are growing extremely tight despite the buildup of inventory in London exchange warehouses. Therefore, it is not surprising Goldman has predicted copper to hold up despite slack economic conditions in the country. According to a report overnight, the Chinese government has instructed its economic analysts to avoid the use of deflation and recession in their official descriptions of the economy. Fortunately for the bull camp, Codelco cut its full year copper production forecast to 1.31-1.35 million tons from 1.35-1.4 million tons or a 3.97% decrease. Furthermore, given the reduced production the net year-over-year reduction in supply flow from one of the world’s largest mining companies, is likely to be in a range of 6.6-9.4%. While Shanghai copper warehouse stocks last week posted a noted decline of 14.9%, LME copper warehouse stocks continue to reel off a string of daily inflows in an approximate range of 1,500 to 2,500 tonnes a day and that has left more than enough copper available to non-Chinese customers to suppress copper prices. However, China is scheduled to release trade figures which will include copper and copper concentrate flows and that could set the tone for the remainder of the week.
GOLD / SILVER
The initial trade in gold today is lower in a knee-jerk reaction to slightly higher US dollar action and from a slight blip up in US interest rates. The Peoples Bank of China overnight posted another incremental increase in gold reserves in July of roughly 2 million ounces in a continuation of their gradual and difficult to monitor buildup of gold reserves. Unfortunately for the bull camp, gold ETF holdings saw a 10th straight daily outflow last Friday bringing net sales from holdings this year up to 2.86 million ounces. Furthermore, silver ETF holdings on Friday declined by 2.3 million ounces bringing this year’s net sales tally to 21.7 million ounces. The focus of the gold trade will shift to Chinese trade data tonight and then to European CPI followed by Chinese inflation readings early Wednesday morning and then capping off the week with readings on US CPI on Thursday and US PPI on Friday. A fresh negative for gold and silver are comments from the Fed’s Bowman indicating that more hikes may be needed in the battle against inflation. In retrospect, the hard down attempt last week in gold and silver was indicative of a market behaving bearishly even in the face of supportive signals from its strongest outside market indicator (the dollar). In fact, the dollar came under aggressive pressure and violated a series of technical points and traded against bullish developments of surging US interest rates. With treasuries falling sharply in the face of soft US economic data, both the dollar and treasuries look to remain in downward motion. Therefore, the markets appear to be set to discount the benefits of a weaker dollar and instead fret over higher rates. In today’s action, the markets will be presented with Chinese currency and gold reserve holdings which are likely to be supportive or inconsequential.
PLATINUM / PALLADIUM
While the platinum market has managed a 3 day high in the early trade today, we remain bearish toward the market with ongoing signs of outflows from ETF instruments, the threat of rising rates and a strengthening dollar all combining for a conclusive bearish environment. Last week, platinum ETF holdings declined by 7,497 ounces on a world base of holdings of 3.1 million ounces. A negative supply development came from one of the world’s largest platinum mining companies Implats report of a 2% year-over-year increase in their 6-month production readings to a final output of 3.2 million ounces. With fresh internal supply and demand information mostly offsetting, outside market forces bearish and the charts projecting a move down to $900, the bear camp has control. Furthermore, the most recent COT positioning showed a slightly vulnerable net spec and fund long positioning. With platinum continuing lower despite evidence of three straight months of strong US vehicle demand from last week the trade is not interested in bullish demand prospects. The palladium market continues to coil and we expect that action to continue.
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