Written Commentary
GOLD / SILVER
With a three-day low in the dollar extending a lower high and lower low pattern and US treasuries posting early gains, gold and silver bulls have an edge from outside market action. The dollar was clearly undermined by disappointing US new home sales readings for January yesterday, and we suspect the trade saw some anticipatory selling ahead of what is expected to be a very soft US durable goods report today. While we think softer economic activity will undermine gold and silver prices because of the recent focus on the potential for improved physical demand, it is possible a very disappointing US durable goods report will knock the dollar sharply lower and in turn help gold and silver find firm support. Unfortunately for the bull camp, the gold market failed to extend last week’s pattern of higher highs, which suggests the bull camp needs more than minimal losses in the dollar to catch a strong bid. It is also possible that the gold trade is looking ahead to the Fed’s favorite inflation measure (PCE) later this week, as that could be the most important input to the Fed’s policy decisions in the coming months. However, it is premature to look several days ahead with a flurry of US reports today capable of prompting significant volatility before the inflation readings are released.
COPPER
While Chinese equity markets overnight managed recoveries of more than 1% overnight and that should provide copper with support, news that Hong Kong housing prices reached 7 1/2 year lows in January rekindles concerns for the Chinese economy. However, copper bulls are saved by a recovery in iron ore futures prices overnight reportedly from hopes of a domestic demand recovery for steel. Unfortunately for the bull camp, Chinese copper processing fees have plunged to the lowest levels of available data (back to 2013) with the trade blaming excess Chinese smelting activity which could have contributed to last week’s upside explosion in Shanghai copper warehouse stocks. In conclusion, Chinese news favors the bear camp in copper especially with disappointing US new home sales for January yesterday and expectations for a very soft US durable goods report later this morning.
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