Gold and Silver Diverge

GOLD / SILVER

Seeing the gold market track lower in the face of the official First Republic Bank failure highlights the market’s lack of sensitivity to flight to quality events. Furthermore, seeing gold and silver diverge suggests flight to quality sentiment is really moderating and the trade is possibly looking at silver as an undervalued commodity following the deficit projections from the Silver Institute. We give the edge to the bear camp this week with fear of the Fed dominating early in the week and the potential for a trend signal following the Fed’s decision on Wednesday. Fortunately for the bull camp, last Friday’s dollar rally fizzled and produced a negative chart signal. However, while weakness in the dollar will certainly provide support to gold and silver prices, the charts in gold and silver also favor the bear camp. While the May Day holiday could narrow trading ranges in the US trade, the markets will be presented with both US employment and prices paid readings from ISM manufacturing for April and projections call for both jobs and price readings to rise from the prior month. Therefore, fear of a US Fed hike is likely to be stoked slightly and that should add pressure to gold and silver. Gold is especially vulnerable from the latest positioning report which shows a net spec and fund long sitting near the highest levels in 12 months.

PALLADIUM / PLATINUM

Since we expect a risk off mentality to dominate commodities in the first half of this week and given bad news on the status of Chinese economy, we see the path of least resistance pointing down. From a technical perspective, the platinum market is very vulnerable to a net spec and fund long position very near the highest levels in 14 months. Going forward, we expect daily inflow and outflow from platinum ETF holdings to remain very volatile with holdings last week reaching the highest level since March of last year. Furthermore, platinum ETF holdings are now 6.8% higher year-to-date. As we have been indicating, the palladium market has failed to benefit from the potential for improved demand from China as has been the case in the platinum market. However, the trade is fully embracing the expectation that palladium will lose industrial market share to platinum and the platinum/palladium spread will continue to narrow..

COPPER

Seeing copper prices post minimal declines this morning in the face of a discouraging Chinese April manufacturing PMI survey adds credence to the idea of value at last week’s lows. However, the soft Chinese data has instantly fostered calls for, predictions of and hope among Chinese companies of further Chinese government policy support. It should be noted that the markets were tossing around two different types of support plans last week, but those plans were not likely to be a direct benefit for copper in the near term. It appears that a small measure of risk on and slightly positive Chinese economic news resulted in copper rejecting the 4-month low and last week with the trade extending the recovery into a 2nd day during last week’s late trading. However, the copper market is facing talk of more consistent production from South America which could reduce price volatility and limit the magnitude of gains in copper. On the other hand, last week the International Copper Study Group predicted a 2023 world copper market deficit of 114,000 tonnes, and that deficit was given credence by last week’s news of a 4.7% year-over-year decline in Chilean copper production.

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