Copper weakness drags silver lower as gold maintains stability Copper weakness drags silver lower as gold maintains stability Copper weakness drags silver lower as gold maintains stability

Copper weakness drags silver lower as gold maintains stability

Ole Hansen

Head of Commodity Strategy

Summary:  Copper has broken below key support for the first time in four months with China's weak demand recovery supporting fresh selling by momentum-based funds forcing a reduction from long-term focused bulls. The weakness has spread to silver while gold has only seen some light profit taking following the latest US inflation print. Overall developments that points to patience within the industrial metal complex while gold remains the go to metal at time of heightened uncertainty on many fronts.


Today's Saxo Market Call podcast
Global Market Quick Take: Europe


 

Copper futures in London and New York trade below key support for the first time in four months, thereby supporting fresh selling by momentum-based funds forcing a reduction from long-term focused bulls. The weakness has spread to silver, already trading softer in line with gold after Wednesday’s US inflation report raised concerns about the FOMC’ willingness to deliver the +75 basis points rate cuts that are currently priced in for this year. 

During the past month we have seen broad losses across energy and industrial metals in response to continued concerns about the global economic outlook and a recovery in China that has proven to be less commodity intensive than previous government supported growth sprints. Instead, the acceleration in Chinese growth, potentially reaching 6% this year, has been led by consumer demand and the service sector, rather than infrastructure spending and construction. 

We view the current setback in copper as temporary as the green transformation theme in the coming years will continue to provide a strong tailwind for copper, the best electrical-conducting metal towards the green transformation which includes batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Not least considering how producers face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds. 

A development that will likely see the market turn into and remain in a deficit in the coming years, thereby underpinning prices in order to support mining companies' profitability and their appetite for embarking on new multi-billion multi-year projects in order to add supply. In the short term, however, the market is challenged by demand softness and by short sellers looking for lower prices. According to the latest Commitment of Traders report covering the week to May 5, the HG copper net-short held by hedge funds jumped 49% to 15.7k lots, a nine-month high. 

In a downtrend since the January peak at $4.3550/lb – on China re-opening optimism – the front month HG futures contract now trades back below support-turned-resistance at $3.80/lb, and below the 200-day moving average and the 50% retracement of the September to January rally. The next key level of support will be $3.6680/lb, the 61.8% retracement. 

Source: Saxo
Silver trades lower on the mentioned weakness in copper and in the process the gold-silver ratio has rallied to a one-month high above 81 (ounces of silver to one ounce of gold) from a recent low around 78.50. The semi-precious metal has for the past month been trading within a $26 to $24.60/oz range, and from a technical perspective a downside break may signal a short-term double top while raising the risk of a deeper correction to $23.75.
Source: Saxo

Gold jumped to near resistance in the $2050 area after the US inflation report supported the market’s view of a Fed pause. However, the fact it fuelled further rate cut bets during the second half, currently around 80 bps, may end up being gold’s biggest short-term challenge. With core inflation unchanged at 5.5%, there is still a lot of work to be done before the FOMC can declare victory, unless a) they adjust higher their inflation target, currently at 2%, b) the US run into a recession that forces them to refocus their attention, or c) an economic shock of some kind hits the economy. 

While the short-term outlook points to further consolidation as we await incoming economic data, we keep an overall bullish outlook for gold, driven among others by the following developments and expectations:

 
  • Continued dollar weakness as yield differentials continue to narrow.

  • Peak Fed rates, when confirmed, have historically on the three earlier occasions during the past 20 years supported strong gains in gold in the months and quarters that followed

  • Central bank demand look set to continue as the de-dollarization focus continues to attract demand from several central banks. One unknown is how price sensitive, if at all, this demand will be. We suspect it will be limited, with higher prices not necessarily preventing continued accumulation. 

  • We believe inflation is going to be much stickier with market expectations for a drop back to 2.5% perhaps being met in the short-term but not in the long-term, forcing a gold supportive repricing of real yields lower.

  • A multipolar world raising the geopolitical temperature

  • Low investor participation adding support should the above-mentioned drivers eventually provide the expected breakout. 

Gold currently trades within a 200-dollar wide upward trending channel that started back in November, once the triple bottom was confirmed by the move above $1730. Following the strong March to April runup - triggered by a drop in short-term interest rates and yields in response to the banking crisis - gold went through a period of consolidation before last week’s runup to a fresh record high. Key support remains in the $1990 to $2000 area ahead of $1950, while the next level of major resistance above $2050 is not until the $2100 area. 

 


Source: Saxo
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.