Written Commentary
GOLD / SILVER
While February gold did not post a lower low trade overnight, fundamental developments favor more declines and a trade below $2000. In addition to hawkish ECB dialogue predicting no rate cuts until summer, expectations for a US cut have been pushed further into the future with US data continuing to signal an economy holding together which in turn has been accompanied by a consistent reduction in the probability of a first quarter US rate cut. However, the bull camp should get some credit for prices tracking in positive territory this morning especially with the Chinese Premier discounting the prospects of stimulus package from the government. Unfortunately for the bull camp, seeing gold prices hold up in the face of a patently bearish environment is unlikely to signal a bottom. In fact, if today’s US initial claims reading matches or comes in below last week’s reading (specifically below 200,000) the prospect of a first quarter US rate cut should be driven even lower, the dollar and interest rates should rise, and we see February gold dipping below $2000. Currently, the gold market is not showing sensitivity to classic flight to quality events as the market fell sharply yesterday in the face of Iranian missile attacks on targets inside Pakistan. Therefore, it might take direct confrontation between the US and Iranian militaries to switch on safe haven gold buying.
COPPER
With March copper prices sitting just above 2 1/2 month lows this morning in the face of an 18.2% increase in December Chinese copper concentrate imports, the trade is clearly looking forward to soft Chinese copper demand instead of looking backward to history. Therefore, the copper trade appears to be fully embracing the view that the Chinese will not offer up a major stimulus package this year. Apparently, the Chinese premier “played down the idea of a large stimulus package overnight” which leaves the bull camp fearful of sagging copper consumption by the world’s largest user. Even the supply side of the equation produced bearish news overnight with BHP Group LTD posting an increase in quarterly copper production of 12,000 tons versus year ago levels. Fortunately for the bull camp, HSBC copper revised its copper price forecast upward and expects the world copper market to remain in a deficit because of lingering Central and South American production issues. In conclusion, the Chinese economy remains hostage to serious troubles in the property sector and Chinese leadership does not appear to be in a proactive position to support their economy.
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