Copper Market Recovers Overnight

COPPER

The copper market has recovered overnight partly because of a modest amount of risk on flowing from equities, but also because of a stronger than expected Chinese services PMI reading. However, the brunt of the gain this morning is likely the result of reports that the PBOC is planning targeted stimulus which will be designed to address inflationary pressures. On the other hand, it should be noted that Shanghai copper prices overnight posted a 2-month low reportedly off infection fears. The downside breakout in March copper yesterday to the lowest level since November 30th was justified by predictions that Chinese daily infections are nearing 2 million per day. In our opinion, it is possible that Chinese infections could continue to explode but the number of serious illness and death might be less than feared. On the other hand, the Chinese government has stopped providing daily infection counts which should be unnerving to the bull camp. The bull camp is not without some arguments as Chilean November copper production fell by 5.5% and the potential for a shutdown of a Panamanian copper mine over a tax dispute should not be discounted.

GOLD / SILVER

In retrospect, it appears that gold and silver markets this week shifted their primary focus away from action in the dollar and instead took increased direction from the action in US treasuries. However, both outside forces of dollar and treasuries will likely exert significant influence on gold and silver prices today, as the markets continue to glean information likely to impact the Fed’s policy decisions ahead. Certainly, the weakness in the dollar over the past 3 months will remain a primary driving force for gold and silver, but a strong rally in treasuries following soft jobs data would likely propel gold and silver to higher highs especially with the Dollar downtrend is restarted by soft data. While strength in gold and silver could be signaling a major uptrend, a sustained uptrend will require progressive weakness in the dollar index and signs that the US Fed has gained ground on inflation and that the ultimate US terminal Fed funds rate might not be as high as expected. The Federal Reserve open market committee meeting minutes release from December’s meeting started out supportive for gold and silver with the comment that “all officials at the Federal Reserve’s December 13/14th policy meeting agreed the US central bank should slow the pace of its aggressive interest rate increases.” However, the Fed notes also made it very clear that the markets should not discount the Fed’s intention to aggressively battle inflation deep into 2023.

PALLADIUM / PLATINUM

In looking ahead to 2023, we expect to see significant daily divergence between palladium and platinum prices. Granted, both markets have relatively thin trading volumes and seeing the trade shift away from palladium could leave the palladium market with very low trade volume and declining open interest. So far this year, the PGM group ETFs have shown minimal outflows and with the fear of further gains in interest rates investors are unlikely to turn positive toward the PGM group metals until the US Fed officially “pivots”. Even the positioning shows a definitive bullish bias with the palladium market net spec and fund short and the platinum net spec and fund long nearing the highest levels since April 2021! In the end, we expect fresh new lows for the move in palladium directly ahead and expect platinum prices to continue to claw higher with the potential to retest the 2022 high above $1,150.

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