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Upside Action in Copper


The beat goes on with copper forging another higher high early today and managing the upside action without the Chinese Central Bank supporting the Chinese economy with a reduction in interest rates overnight. While we are surprised with the copper market’s capacity to rally, a prediction from the Antofagasta CEO of increased demand in the “Americas” and a 2024 deficit in a range of 200,000 to 300,000 tons that provides badly needed fundamental support for the bull case. However, the copper market is significantly overbought from short-term technical measures and from the net spec and fund long as measured by the COT report. Last Tuesday the copper market net spec and fund long reached the highest level since May 2021 and after the report added $0.26 indicating the net spec and fund long reading was likely very understated. In the end, if the contrived reduction in Chinese smelting capacity sparked the rally, we expect higher pricing to bring some smelting activity back online especially given increased seasonal demand ahead.


The vibe in the Middle East seems to suggest that the “tit-for-tat” fighting between Israel and Iran will pause has obviously punctured bullish sentiment in gold and silver. Therefore, the focus of gold and silver is likely to shift back to action in the dollar and US treasury yields. While silver ETF holdings continue to decline very rapidly, gold ETF holdings declines are less significant. Even though we suspect the Chinese central bank will continue to add to reserves suspect lower prices will have only a marginal impact on the size of Chinese Central Bank purchases. However, we suspect China’s desire to diversify away from US dollar instruments will entrench consistent buying out of China. Furthermore, there was a report over the weekend of massive recent Russian gold buying from Singapore. The initial invasion of Ukraine focused sanctions on Russia’s utilization of gold as a currency, with restrictions on their currency requiring the use of a non-sanctioned currency. The Allies have had difficulty enforcing what sanctions are already in place, and blocking Russian gold shipments should be harder than oil given their smaller portable size. Unfortunately for the bull camp the gold contract significantly overbought in its net spec and fund categories with the report last week registering the highest net long since June 2021. While short-term technical signals in silver like stochastics are in sell mode, the silver market has built a credible layer of consolidation support starting at $27.92. Nonetheless, silver will continue to take direction from gold, the dollar, and to a lesser degree from the equity markets.


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