Currency Impact on Gold Uncertain

GOLD / SILVER

Apparently, severe losses in Chinese equity markets has prompted Chinese officials to consider implementing a $278 billion rescue package. Therefore, gold may see some limited flight to quality buying interest, but as mentioned many times over the last year, the gold and silver trade are not as sensitive to flight to quality events as in the past. On the other hand, if the situation becomes dire and there is a chance of contagion that could pull in a noted measure of spec and fund longs. Unfortunately for the bull camp, gold ETF holdings continue to plunge signaling little interest in the metal among smaller traders and investors. While the dollar posted a modest failure on its charts yesterday, it recoiled from that breakdown and closed positive on Monday leaving the currency impact on gold uncertain today. However, the dollar was presented with a soft US leading indicator reading yesterday and that should keep a lid on the dollar today. In a limiting development the India government raised the import duty on gold and silver from 11% to 15% effective yesterday in a move that should temper Indian physical demand patterns. However, some gold bulls continue to hold out hope for lower US rates, but that hope appears to be misguided with the latest CME Fed Watch tool market view suggesting only a 40% probability of a rate cut in March with a 54% chance of a cut at the May FOMC meeting.

COPPER

Perhaps the copper market is cheered by signs of a recovery in Chinese equity markets overnight, with the Shanghai stock exchange composite trading 0.5% higher and the CSI 300 trading 0.4% higher. Apparently, the Chinese government is considering a $278 billion rescue package for the stock market which is a very unusual and concerning development for copper and copper demand. Unfortunately for the bull camp, daily LME copper warehouse stocks continue to rise with the overnight gain of 2825 tons larger than recent daily inflows and in turn extending the pattern of inflows started last week. We were not surprised to see copper prices track lower yesterday, but we were surprised the market was not under more aggressive selling pressure given rising concerns toward the Chinese financial/real estate sector and the status of local governments heavily indebted especially after infrastructure programs were halted. While the report that some Chinese local governments have been advised by the central government to halt infrastructure programs was in the market at the end of last week, but the Chinese central bank did not cut interest rates yesterday and the rumor mill on trouble in their economy has been kicked into a higher gear.

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