Written Commentary
PLATINUM / PALLADIUM
With a slight positive track early today the platinum market has apparently linked up with the gold trade and embraced signs of lower interest rates over the threat of a strengthening dollar. While not a major development, platinum ETF holdings declined again yesterday by 1013 ounces which reduces the year-to-date inflow to 4.7%. As in the gold and silver markets, we suspect platinum will see increased sensitivity to interest rate and currency market action as dovish signals from the Fed symposium could spark a series of further gains in platinum prices. Certainly, increased prospects of a US Fed pause would facilitate bargain-hunting speculation in oversold markets like platinum. However, flight to quality and physical demand interest has been fleeting and unreliable this year. While the gains in palladium are disappointing relative to the gains in gold, silver, and platinum, there appears to be a developing tide capable of lifting all boats in the precious metal complex. However, the palladium market has been largely unresponsive to bullish and bearish elements with the most significant bullish factor a record spec and fund short position which has been casually discounted by the trade over the last several months.
GOLD / SILVER
Apparently the gold and silver trade is focused on declining US rates and is discounting a higher high move in the dollar this morning. Traders/investors are generally content to hold gold through upcoming Fed policy guidance headlines and despite a widely held belief that the Fed will ultimately hike rates one more time. In a minimal bearish development, the CME Fed watch tool placed the odds of a US pause next month slightly lower than earlier in the week at 86.5%. On the other hand, a long string of outflows from gold ETF holdings reversed modestly yesterday with an inflow. In retrospect, the higher price action in gold and silver yesterday was very surprising as strength in the dollar failed to prevent gains in gold and silver prices. In our opinion, lower US bank credit ratings and warnings from the credit rating agencies of extremely difficult conditions facing US banks could be the most important consideration in next month’s Fed policy meeting. Therefore, it is possible that the gold and silver markets are expecting this week’s Fed dialogue to favor a pause in hiking rates, which in turn would pressure the dollar and in turn remove a major headwind against investing in gold and other precious metals. Other potential major flight to quality forces could be the potential of a constitutional crisis from charges of corruption on both sides of the political aisle and a return to threats of a US government shutdown from a lack of funding. In conclusion, recent market action suggests the gold and silver trade will primarily react to US rate fluctuations, which in turn will be heavily impacted by dialogue from the Fed symposium. While we remain bearish toward gold and silver, we acknowledge the potential for a fresh bullish focus on flight to quality issues.
COPPER
Apparently, the path of least resistance remains up despite bearish copper market issues of Chinese copper demand fear, residual strength in the US dollar, recent 16-year highs in treasury note yields and unending daily gains in LME copper warehouse stocks. However, this week the copper trade has embraced ideas that Chinese consumption data is improving and could improve further from the impact of a growing list of different Chinese stimulus efforts. According to Chinese government statistics, Chinese apparent demand of refined copper in the first half of this year increased by 9% with other activity measures showing increased activity of Chinese copper cable plants, power grid activity and increased construction activity. However, classic macroeconomic indicators and regularly scheduled Chinese reports have depicted ongoing sluggishness and fears of a debt crisis in China. Certainly, seeing domestic Chinese copper inventories holding at less than 3 days usage is a very powerful bullish force, but tight supplies are not explosive without expectations of improving demand.
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