Major Event Ahead for Copper?

COPPER

Apparently, the copper trade has shifted into a posture where modest bullish developments are fully embraced by the market. In our opinion, this week’s rally was forged off news that two major Chinese cities saw Covid restrictions relaxed. While it may be misguided thinking, some traders think the relaxing of restrictions was the result of protests which insinuates the central government “backed down”. In our opinion, China moved to reduce activity restrictions for economic purposes in two key manufacturing cities, but President Xi is still likely to react aggressively to tamp down protests and that could become a copper demand destruction threat in the days ahead. However, seeing March copper rally aggressively yesterday in the face of news of an increase in copper production by Chile of 2.2% last month, indicates the copper market at present is not concerned about rising production or Chinese demand destruction. With BHP overnight warning of a shortfall in skilled workers (mining engineers and mathematicians) will result in the inability to provide enough copper and nickel supply for the energy transition. The copper market should see the last 5 months consolidation as a major bottom in prices. In the near term, the copper market appears to be linked inversely with the US dollar and therefore this week’s US jobs report could be a major event for the copper trade.

GOLD / SILVER

While the gold market rally is impressive this morning, seeing the market rally without definitive weakness in the dollar should embolden the bull camp. Certainly, the dollar is tracking lower but has not forged a new low for the week in the early going. While the net spec and fund long in gold has jumped by nearly 100,000 contracts since the 2022 spec long low back in September, the current spec long remains more than 200,000 contracts below the high net spec high long of 2022. Similarly, the silver net spec and fund long positioning is 42,000 contracts below the 2022 high spec net long reading. Going forward, we expect the inverse relationship between the dollar and precious metals to intensify into the Friday close. US Jobs data released yesterday signaled some softening which should moderate hawkish Fed sentiment somewhat. In the end, the bull camp in gold and silver needs a “Goldilocks” job report takeaway to weaken the dollar without fostering recession/deflation inspired selling of gold and silver. Even though the gold market has been hesitant to embrace flight to quality interest over the past several years, labor problems/strikes in South Korea and widespread Chinese protests over extreme Covid activity restrictions could result in renewed supply chain problems which in turn could rekindle inflation around the world. While it appears that the Chinese government caved into protests with a relaxing of Covid activity restrictions in 2 major cities, aggressive action by the Chinese central government against citizens could result in a significant jump in gold demand in mainland China flowing from Hong Kong. On the other hand, some financial analysts yesterday indicated the Fed could still implement a jumbo rate hike later this month following a hotter than expected core personal consumption expenditure reading in the GDP report yesterday. In our opinion, the markets would be very surprised if the Fed continued to raise rates aggressively and that would firm the dollar and dump gold. Silver on the other hand is showing impressive chart action and positive divergence with gold. Perhaps the silver market continues to draft support from the Silver Institute forecast of a looming deficit.

PALLADIUM / PLATINUM

In retrospect, seeing March Palladium slide aggressively from the mid-November high on a jump in trading volume and a significant decline in open interest suggest the market balanced its technical readings and potentially forged a key bottom at the $1,800 level. Furthermore, the palladium market remains net spec and fund short and has respected the $1800 level on 5 major occasions this year. Like gold and silver, (but to a lesser degree) the PGM markets should benefit from the less hawkish guidance from the US Federal Reserve. However, we think palladium and platinum prices saw most of their lift yesterday from news that China had reduced activity restrictions in 2 major Chinese cities. With labor problems also surfacing in South Korea, the prospect of supply chain problems for the automotive industry returns and that in turn could reduce demand for auto catalyst inputs. While the markets have heavily discounted a forecast from Russia’s Nornickel of a global palladium deficit of 600,000 ounces this year and a global palladium deficit of 800,000 ounces next year, the flow of PGM supply from Russia clearly remains at risk. Certainly, Russian PGM supply has worked its way onto the world market but talk of biological or tactical nuclear weapons use by Russia in Ukraine would likely shut off that supply flow. Critical support in March Palladium is $1801 with downtrend channel resistance today pegged at $2,042. While palladium prices sit near multi-quarter lows and close to consolidation low support, January platinum sits very high in the recent trading range and near the top of an uptrend channel. However, January platinum forged yesterday’s sharp range up extension on significant trading volume and an increase in open interest suggesting traders view $1000 as cheap! Unfortunately for the bull camp significant gains over the prior 4 trading sessions leave little in the way of close in support, with first support today pegged at $1018.50.

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