More Headwinds in Copper Expected

COPPER

We suspect part of the strength in copper prices this morning is the result of renewed rising rate fears following European inflation data. However, it is possible that strength in Chinese equity markets overnight is supporting prices early, but we suspect copper will continue to see headwinds from the lengthening pattern of inflows to Shanghai copper warehouse stocks. In a surprising development, the LME has indicated there are no Russian copper supplies under warrant at present but the focus on Russian copper supply at exchanges could complicate supply channels ahead. Unfortunately for the bull camp the latest COT positioning report (still delayed by several weeks) showed a net spec and fund long positioning near the highest level since April last year. While political tensions between the US and China have not worsened substantially, reports that the Covid virus indeed originated and escaped from a Chinese lab could create some Chinese copper demand concerns if the situation escalates.

GOLD / SILVER

Fortunately, the bull camp in gold and silver the dollar index is trying to trade softer this morning as overnight inflation readings from Europe could have sent gold and silver prices sharply lower. Nonetheless, April gold posted a lower low overnight and the path of least resistance from both technical and fundamental factors favors the bear camp. Fortunately for the bull camp both gold and silver added ETF holdings yesterday after seeing very large outflows at the end of last week. In fact, the 304,028-ounce inflow to gold ETF holdings was the single largest daily inflow since the middle of June last year. In short, interest in gold futures continues to wane in the face of unrelenting rate hike fears and fear of renewed dollar strength just under the surface. While the US will release house price index reading today (both public and private readings) we suspect softening of housing prices will be seen following the jump in mortgage rates over the last month.

PALLADIUM / PLATINUM

While the platinum market managed to hold its recovery from yesterday’s four-month low probe, prices this morning have generally tracked in negative territory and the market is facing negative supply headwinds from Bloomberg headlines indicating auto sector recycling will become the 2nd largest source of supply. On the other hand, Bloomberg also took notice that four companies currently account for 93% of global PGM supply with half of those companies facing ongoing physical production obstructions. However, a change in Chinese environmental policies for diesel vehicles allow for the use of pollution devices not comprised of PGM catalysts and that could become a very negative long-term development. Palladium ETF holdings yesterday increased by 32,125 ounces and are now up a very significant 13% year-to-date. We would also note that the “volatility” of daily PGM ETF holdings has increased substantially in a possible sign of growing interest in the sector instruments. While the palladium market has held around yesterday’s close in the overnight trade, negative demand news from China was only partly offset by a significant inflow to palladium ETF holdings. However, the palladium market in terms of total volume is a relatively small global physical commodity and with overall ETF holdings of 502,279-ounces investment could become a very material impact in the world supply and demand balance.

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