Gold Firm – China Troubles and Trump EU Threats
Commentary for Thursday, January 23, 2020 – Gold closed up $9.30 today at $1564.60. With the price of crude oil cooling off and the dollar moving higher you would expect the price of gold to be lethargic at least – perhaps even subject to some healthy profit taking being up $73.00 this past month and $273.00 this past year.
Now consider the 30-day pricing chart which adds to the buzz – moving from $1480.00 through $1570.00 between late December and early January, but this drive to higher prices suddenly flattens out by mid-January holding steady around $1560.00.
So remember the “sweet spot” I have been banging on about for a month – it really makes no difference on the short term what gold does on either side of $1560.00 – it must break higher sustaining prices above its most recent high ($1570.00) before computer trading is going to give everyone the green light.
Today’s $10.00 push at the higher end of this latest extended price trough does neither – so why is it getting some attention? Why are we seeing higher prices now and why are we not seeing the expected round of profit taking? These are some questions which concern the big thinkers in gold now that pricing is holding firm. This is not to say we have trend reversal here – but it does suggest something is not right in River City.
Neils Christensen (Kitco) points out that the economic summit in Switzerland might be providing more gold buzz. “Mike McGlone, senior commodity strategist at Bloomberg Intelligence, said in a report Wednesday that he sees more potential for the precious metal and technology metals, compared to oil as he listens to some of the themes being discussed at this year’s international conference in Davos Switzerland.”
Trump’s threat of EU sanctions is creating concern – like him or not he is capable of rocking the boat at any time – so while I think that safe haven demand is off considerably, especially across our counter his sometimes out of the box behavior is a plus for the physical gold market.
Still I would keep your powder dry. This latest semi-jump in prices looks more like “chop” in a troubled world to me – but with a continuation above $1570.00 would change my mind.
This from Zaner (Chicago) – “Global equity markets overnight were lower, with the Shanghai markets trading 3% lower while most other markets declined by less than 0.3%. While the market has not been presented with fresh official exposure/death readings, China did move to shut down travel at 2 cities thought to be at the center of the outbreak. Global economic news overnight saw Japanese all industry activity for November come in slightly less than expected with their coincident and leading economic indicators also coming in softer than expected. Early in today’s session there will be an ECB interest rate decision and a series of Spanish bond auctions. The North American session will start out with a weekly reading for initial jobless claims that are forecast to have a moderate uptick from the previous 204,000 reading. Ongoing jobless claims are expected to have a modest downtick from the previous 1.767 million reading. The Conference Board’s December reading for leading indicators is forecast to have a modest downtick from November’s unchanged reading. The Kansas City Fed’s January manufacturing activity index is expected to have a minimal uptick from December’s -7 reading. Earnings announcements will include Procter & Gamble, Comcast, Union Pacific, Kimberly-Clark, Travelers and Freeport-McMoran before the Wall Street opening while Intel and Intuitive Surgical report after the close.
The April gold contract continues to mark time on the charts with sideways action but in the process we feel the $1550 level has been enforced as a key support level. While potential news flow from the virus situation is capable of popping-up and dominating price action at any time, this morning’s initial focus will temporarily shift to the ECB interest rate decision. However traders do not expect any change in policy with the bank expected to sustain a negative deposit rate of 0.5%. While the Chinese virus situation has already become a global virus issue, economic news from Tuesday got the attention of gold following negative economic views from the Moody’s credit rating agency earlier this week and the trade saw a contraction in the Chicago Fed National Activity Index and that has fostered some economic uncertainty. Therefore the gold market is likely to take some initial direction from today’s US scheduled data flow (weak data should lift prices and strong data should pressure). However in the near term, it could be extremely difficult to determine which if any fundamental factor will be capable of driving gold prices out of the recent range and it could even be more difficult to determine which direction a specific fundamental will drive prices as the focus waffles back and forth from safe haven and fears of slowing. For example, the initial surprise of the outbreak of the virus actually resulted in a slide in gold that appeared to be deflationary in nature. On the other hand, the technical condition seems to offer solid support and gold does not appear to be negatively impacted by gains in equities or strength in the dollar. We continue to suggest those looking to be long gold consider the purchase of put protection for those positions. Given the intense media coverage of the virus it wasn’t surprising to see Gold ETF’s yesterday add 124,130 ounces to their holdings bringing this year’s net purchases up to 370,211 ounces. Clearly many ETF investors are seeking to hedge equity investments while others are simply attempting capitalize on the prospect of a pandemic. Unfortunately for silver bulls ETF holdings were reduced by 485,597 ounces boosting this year’s net sales to 8.68 million ounces and extending the liquidation streak to 7th day.
The palladium market ranged sharply higher again overnight and managed that rally in the wake of a historic rally yesterday! Certainly technical measures are flashing red, but we think it is possible that bullish fundamentals are starting to materialize, with stories overnight suggesting the South African power outages are expected to add to the existing shortage. In fact overnight Amplats indicated power issues last year reduced their output by 38,000 ounces and the pattern of blackouts has clearly extended into 2020 and may worsen. While not a major additive to the lost production potential, one has to wonder if normal seasonal power demands will add to the shortfall of power availability in South Africa. While a reduction in output of 38,000 ounces from one company might not seem significant, that reduction might add another 5% to the projected deficit of 820,000 ounces in 2019. However another more sinister potential behind the rally, could be news that a Russian fund (establish to meet PGM contract demand at Russian companies) has been buying on the open market because of their persistent declining output. In fact if Russian mining company interests are buying palladium on the open market that action has created a significant windfall and might perpetuate until a conclusion at some point in the “future”. For example analysts have suggested that ETFs won’t be able to cover shortages in the long term as holdings have fallen to about 613,000 ounces from levels above 2.5 million ounces back in 2015. In other words total ETF holdings are barely enough to cover the 500,000 ounce supply deficit from a single top miner (MMC Norilsk Nickel). Reportedly the Russian palladium fund used to meet customers’ demand reportedly sold more than 1 million ounces from it between 2017 and 2018 which reduced their reserves and highlights the need to replenish their cache. Palladium ETF’s did decrease their holdings yesterday by 1,622 ounces with that outflow the 5th straight day of liquidation. However we would note that flows into palladium ETF’s have not budged from the lowest level since their inception which suggests those instruments are not being utilized yet in the current rally. While palladium options are extremely thin and difficult to trade, those with long futures positions might attempt to implement near to the money bear put spreads as the risk of longs in our opinion is now extreme. As we indicated a number times over the last 2 weeks, it probably takes continued gains in palladium prices to “drag” platinum prices higher and that appears to be the case. Uptrend channel support in April platinum in the short term is seen at $1,001 with a longer-term uptrend channel support seen at $980 and that uptrend channel support line increasing to $1,011.30 on Monday.
As indicated already in our coverage today we suspect that daily ranges are set to expand throughout the precious metals complex with standard fundamental factors potentially not driving markets in the directions that would normally be expected. However, the gold market has shown consistent and building support above the $1,550 level and traders should remain long but utilize two long gold put options against each long futures position. As for silver, we are less bullish and think the market is especially vulnerable to any notable expansion in virus numbers today.”
Silver closed unchanged today $17.77. This market has been quiet of late but the buying of monster boxes these past few days has picked up.
Platinum closed down $14.10 at $1001.70 and palladium closed down $6.60 at $2342.00. These markets continue to be very volatile – if you are buying or selling make sure you get either a Purchase Order Number or Invoice Number from Alex confirming the trade.
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