Recovery Bounce in Gold & Silver

GOLD / SILVER

With a slight corrective setback in the dollar, this morning’s recovery bounce in gold and silver is not surprising. With market expectations pegging today’s US rate hike as nearly a certainty, the focus of the markets will be on the tone and direction of future policy dialogue in the Fed’s statement. With the recent upward bias in the dollar leaving sentiment toward the Dollar pointing higher, today’s likely anticipated US rate hike and fears of an ECB rate hike tomorrow, should leave the bear camp with plenty of ammunition. However, in addition to unending Chinese stimulus promises, gold should be cheered by news that Chinese gold consumption in the first half of 2023 increase by 16.4% (according to the China Gold Association). Apparently, Chinese gold production has returned to pre-Covid levels, and seeing Chinese gold demand easily outstrip the increase in domestic production should embolden the bull camp going forward. A minimal addition to the bull case is news that the Bank of Ghana increased their gold reserves which is a reminder that many global central banks are in process of raising their gold reserves. Certainly, the trade has factored in today’s US rate hike consistently over the last month, and therefore the reality of a hike could be a cause for a bottom in gold prices. While gold has not experienced flight to quality buying interest, recent reports that Russia has attacked merchant ships (as opposed to military vessels) adds escalation in the uncertainty flowing from.

PLATINUM / PALLADIUM

With a measure of global risk off, initial strength in the dollar and a looming US rate hike, the platinum market faces headwinds against this week’s initial recovery bounce. As in the gold market, the platinum trade has not shown sensitivity to the potential for disrupted Russian supply flow but news that Russia attacked a merchant ship in a Ukrainian port could result in talk of additional sanctions. Furthermore, given the near daily escalation of Russian aggressiveness, we caution against selling platinum and palladium in the near term. However, Russian mining company Norilsk yesterday posted a 2nd quarter palladium output gain of seven percent, and the company also posted an increase of eighteen percent in platinum production which offsets a mining strike at a smaller South African PGM producer. Certainly, the potential for a risk off global commodity session is increased with the US Fed widely anticipated to raise rates today, but platinum and palladium should see some residual macroeconomic support from what seems to have become a daily stimulus offering pattern from China. With the palladium market coiling in a tight sideways range and failing to benefit from improved economic sentiment over the last week, the market is vulnerable to today’s Fed event.

COPPER

In retrospect, the Chinese government meeting this week added to stimulus offers from last week but without specific details and action timelines, the copper trade remains unimpressed. However, a fifth stimulus offer from the Chinese government partially shifted sentiment in favor of the bull camp in copper even though the market feels like it is fighting ongoing macro headwinds. So far, Chinese stimulus announcements continue to lack definitive specifics which in turn has resulted in traders remaining skeptical toward a host of physical commodities. While the latest stimulus announcement indicated support for “commodities” the markets are uncertain as to the implications of that announcement. Another supportive development for copper going forward is upward revisions of 3-month and 6-month copper price forecasts from Goldman Sachs. In a negative far into the future supply side development Rio Tinto has indicated they plan to ramp up production sharply between 2028 and 2036.

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