Focus of Gold Remains on the Dollar

GOLD / SILVER

Despite the potential for the biggest week over week drop in 3 months in gold, we expect the bull track to regain its footing soon. Certainly, the bounce in the Dollar from yesterday’s low, and uncertainty ahead of today’s US payroll report has prompted long profit-taking over the last 24 hours. We suspect the focus of the gold trade will remain firmly on the US dollar today and that was reiterated in yesterday’s action as gold prices tracked in sync with the ebb and flow of the currency markets. In fact, the bounce in the dollar (after a fresh new low for the move) sparked a high to low setback in gold of nearly $50 an ounce. Remember, strong central bank gold buying interest is in motion, and world gold demand surprisingly improved last year. From a short-term technical perspective, the significant rally in April gold of $60 in 3 days justifies significant corrective action especially if the markets see US jobs data as a positive for the dollar. For the dollar to rally from jobs likely requires a strong reading, which in turn would provide gold bulls with fresh physical, investment, and central bank buying hopes. Unfortunately for the bull camp in silver yesterday silver ETF holdings fell by 888,544 ounces but remain 1.2% higher year-to-date. As opposed to the gold charts, the silver charts were severely damaged with the aggressive range up reversal yesterday. In fact, ongoing weakness in gold and small gains in the dollar could result in March silver testing $23.00 today. However, over the long term, the bull camp should regain control given a Silver Institute forecast of a very significant world deficit of 94 million ounces. On the other hand, silver once again diverged significantly with gold and that action should help cushion silver today if the Dollar rallies and doubt is US economic doubt rekindled.

PALLADIUM / PLATINUM

While the platinum market this morning slipped back from yesterday’s 5-day high, the large rally yesterday partially confirms bullish control especially with trading volume reaching the highest level since January 19th. Furthermore, platinum ETF holdings extended the building pattern of inflows with the addition of 3632 ounces yesterday bringing the year-to-date gain to 1.4%. Another fresh underpin for platinum prices today is a 9% half-year drop in Impala platinum refined copper production which resulted in only 1.48 million ounces of output. Apparently, the decline in Impala production was reportedly caused by “worsening” power outages which are likely to continue through the hot South African season. Despite the demand threats from an Indian increase in duties on platinum product imports, platinum also manages to discount news that fresh platinum production from a BPM mining operation might start earlier than expected (the 2nd half). However, the platinum trade should be cheered going forward after January US light vehicle sales increased to a 15.7 million annualized rate from a 13.3 million annualized rate in December. Going forward, we give the platinum bulls a minor edge, but further gains will likely require an extension of macroeconomic optimism. Not surprisingly, the palladium market showed significantly less positive reaction to the improvement in economic sentiment following the passing of a series of central bank rate hikes this week. However, it is very difficult to embrace a long-term bullish view toward palladium given the assumption of a rotation by auto catalyst manufacturers from palladium to cheaper platinum feedstocks.

COPPER

We are very surprised March copper avoided a fresh lower low for the move this morning in the wake of a massive 86,542 tons single week inflow to Shanghai copper warehouse stocks. However, a portion of the huge jump in Shanghai copper warehouse stocks is diffused by the entrenched daily declines in warehouse stocks at the LME. Certainly, the copper trade views Chinese developments as significantly more important than international copper developments, but LME copper warehouse stocks continue to approach modern trading history lows. Even though Shanghai copper warehouse stocks have jumped enough over the last several weeks to levels 25% above LME stocks balances the blow to the global tightness theme. While the 61.8% weekly jump in Shanghai copper warehouse stocks and reports of slow Chinese copper demand are distinctly bearish, the lack of a fresh new low for the move early today could be an indication that the market is nearing “value”. While the March copper contract initially managed to hold above the Wednesday low yesterday, the contract ultimately posted a lower low and a poor close leaving the technical bias down.

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