Gold & Silver Likely to Face Volatility

GOLD / SILVER

With gold and silver strong into the first inflation release of the monthly inflation report cycle the markets are likely to face a measure of volatility. While the US dollar is showing some early weakness and that contributes to the modest initial gains in gold and silver prices, reports overnight indicate some gold buying may be surfacing from China as the easing of Covid rules has improved economic sentiment. In retrospect, the bull camp should be disappointed with the gold market’s inability to forge and sustain significant gains off evidence of strong central bank gold purchases especially with China reported to be buying for reserves. With Chinese gold reserves a fraction of US central bank gold reserves, we suspect China has been secretly adding to reserves to diversify exposure to the dollar and elevate the country as a major financial influence in the world economy. Going forward, we see the dollar action continuing to dominate the direction of gold and to a lesser degree the action in silver. On the other hand, US treasury yields have fallen precipitously and have contributed some gains in gold and silver and those longs will need as expected US PPI readings to prevent treasury price action turning negative for precious metal prices.

PALLADIUM / PLATINUM

While the palladium market showed an impressive range up rally yesterday, we attribute that rally to position squaring by speculative shorts ahead of US inflation data today. However, the trading volume in palladium has settled below 2,000 contracts, effectively labelling the market as somewhat illiquid. Perhaps yesterday’s rally was a delayed reaction to reduced Chinese Covid restrictions and or was the result of a shift to risk on. Fortunately for the bull camp, trading volume and open interest in platinum depicts a very liquid market and news that Sino-Platinum plans to build a subsidiary in the province of Yunnan could be an indirect sign of improving Chinese demand for platinum. Furthermore, last year traders began to circulate the potential for platinum to gain demand at the expense of palladium in various industrial processes and that is possible already in motion. Therefore, the uptrend in platinum since the September low could have a fundamental basis, but the market is overbought with the net spec and fund long position at the highest level since the middle of March.

COPPER

Despite a jump in Shanghai copper warehouse stocks of 13,320 tons (+20.4%) and news that Chinese copper cathode production in November was 8.9% higher year-over-year March copper prices managed a higher high for the move overnight and breached the $3.90 level again. While we think copper has overpriced the incremental lessening of activity restrictions in China, an aggressive upward revision in forward price forecasts for copper from Goldman Sachs adds credibility to this week’s rally. Apparently, Goldman Sachs raised their copper price targeting because they see improved Chinese economic activity revitalizing extreme tightness fear inside China. The Shanghai copper exchange warehouse stock tally sits at 78,546 tonnes with historical lows down at 25,000 tonnes. On the other hand, Shanghai copper warehouse stocks have seen large weekly changes that could leave the exchange short on deliverable supply. Compounding the tightness story in China are signs that other copper inventory levels inside China are very tight.

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