GOLD / SILVER
In retrospect, it seemed as if precious metal markets and the dollar were the only markets to see significant reaction to the extension of US inflation concerns following US CPI. Therefore, we expect selling in gold and silver again ahead of today’s US Producer Price Index release. After yesterday’s post CPI reaction in metals their nearly exclusive focus on action in the dollar should be expected again this morning. However, we suspect the reactions to the inflation report today will be significantly less than those experienced on Tuesday with the trade already rekindling inflation concern and chattering about even higher terminal rates in the US for 24-hours. It is also possible that traders see the PPI report as a more volatile number involving uneven manufacturing purchase activity and therefore PPI could be discounted by the trade. With a very full slate of US scheduled data beyond PPI today, precious metals are likely to see some classic physical commodity market reactions to the data especially on those showing the pace of the US economy. While the markets were presented with news of a 76% decline (32 month low) in Indian gold imports last month, that news should have been factored yesterday. In fact, the Indian economy continues to be a stellar performer relative to the rest of the world and their gold purchases are likely to rebound, especially with those buyers keen to buy breaks.
PALLADIUM / PLATINUM
The PGM sector should remain squarely on the defensive today as palladium and platinum were pressured by the negative shift in global risk sentiment following signs that US inflation might not be falling. Furthermore, the hot US CPI rekindled interest rate fears and in turn supported the dollar which pressured precious metals across-the-board. The January rebound in US vehicle sales has not provided lasting support to the PGM metals, as US automakers appear content to produce less vehicles, but with higher prices and higher profit margins. The global chip shortage continues to dampen global vehicle production as well, and there may not be any relief until next year. Keep in mind that higher Fed rates lead to higher auto loan rates, which would have an even larger impact than normal with current near-record high vehicle prices. South African infrastructure issues remain a “wild card” factor for the PGM metals as mining operations remain vulnerable to power cuts during the next few months. While we will not argue against additional downside action in palladium, we suspect the market’s net spec and fund short adjusted into yesterday’s low is likely the largest ever.
With the rejection of a sub-$4.00 trade yesterday followed by an exclusively positive trade overnight the consolidation low pattern is given additional credibility as support. The copper market should also be supported today by signs of increased Chinese demand for aluminum and from news that copper cathode supplies in Shanghai declined for the first time in 2 months. Furthermore, Chinese home prices checked a 16 month decline reportedly because of expanded government stimulus efforts for the real estate sector. However, all copper news from China is not bullish with signs of declining Chinese EV sales which reduces industrial demand for copper. It should also be noted that Chinese fabrication/product production fell 8.5% in copper foil and declined by nearly 14% in lithium battery copper foil last month. While not a major supportive development LME copper warehouse stocks broke a recent pattern of inflows with a minimal 1000-ton outflow. Earlier this week LME copper stocks had back-to-back daily increases, which is the first time that has occurred this year and only the second occurrence since November. However, LME copper stocks remain near Monday’s 17-year lows. Even though the markets were aware of potential copper supply disruptions in Panama from a tax battle between the government and First Quantum Minerals LTD overnight headlines revitalize that supportive theme we doubt the markets are poised to rally off that concept.
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