Copper Market Drafting Lift

COPPER

In addition to the construction of consolidation support at the $4.00 level, the copper market is drafting lift from positive global economic psychology and more importantly from improving sentiment toward China from official Chinese statistics indicating deaths and severe cases have plunged by 98% from the peak early last month. Furthermore, the trade is benefiting from trade chatter that the Chinese central bank is planning to cut rates in the 2nd quarter. While not a significant development LME copper warehouse stocks continue to decline but are being discounted because of the recent pattern of massive inflows to Shanghai copper warehouse stocks. However, tomorrow Shanghai copper stocks readings could reverse the pattern of large inflows, if the Chinese economy is gathering momentum after the holiday closure. Furthermore, reports that the world’s second-largest copper producing company continues to face threats of shutdown due to protests have likely provided a significant offset to the large buildup in Shanghai copper stocks. On the other hand, there has been a sharp 19.8% jump in copper production in Peru in December from last year’s figures. Therefore, the bear camp holds a slight edge with both supply and demand factors offering little in the way of fresh supportive news.

GOLD / SILVER

Even though the downside breakout in the dollar index this morning is only a few ticks, the gold and silver markets are drafting support from expectations of a downside extension in the dollar, if US jobs data today extends its recent trend of improvement. We also suspect gold and silver are benefiting from risk on psychology flowing from favorable Disney earnings yesterday and from ongoing strong performance of European equity markets. Normally a physical commodity market would get a noted lift from news of a reduction in production from a key output area but another decline in South African gold output in December of 3.3% versus year ago levels is apparently a minor supportive development. Perhaps the trade has long accepted the downtrend in South African output, but severe power supply issues in South Africa are developing and could cause further losses and generate enough headlines to become a more important issue to the trade. It is possible that gold and to a lesser degree silver are garnering lift from a slight boost in flight to quality interest from rising concern toward Credit Suisse and from threats from Russia against Ukraine if Western fighter jets are employed in the battle. In the silver market, any renewed interest rate fears from US jobs date, a temporary bounce in the dollar from data this morning and brief spillover pressure from a dip in gold could pressure silver and push prices down temporarily to first key support on the charts at $22.20.

PALLADIUM / PLATINUM

The bull camp in the PGM markets should be discouraged this morning with prices tracking lower despite positive action in gold and most importantly from the lack of distinct upside action following a massive inflow to platinum ETF holdings. Not only did platinum ETF holdings extend their developing trend of inflows yesterday, but the inflow also exploded to 10,835 ounces putting holdings 1.9% higher on the year. The PGM markets have also failed to benefit from further news of declining South African December PGM output which declined by 5.3% on a year over year basis. However, given the relatively small size of the world platinum market we think a building pattern of investment flows into ETFs will soon get the attention of the trade. As opposed to the platinum market, the palladium market in the last COT positioning report held a moderately significant net spec and fund short position of 3,500 contracts and with price declines after the COT report was calculated last week the magnitude of the net short has likely expanded significantly. While the power problems in South Africa are not as big of an issue to palladium, as platinum traders should not discount the growing risk of being short palladium with a net spec and fund short, improved global economic sentiment, signs of lower output, a lower dollar and given more supportive outside market action from gold.

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