Gold and silver’s extended period of consolidation continue
Gold’s period of sideways trading following the March to early April surge extended to a second week, and during this time the yellow metal has continued to bounce well ahead of key support in the $1950-55 area. The developments that so far has supported consolidation instead of a correction has been growth concerns sending US rate cut expectations higher, softer bond yields and a continued lingering banking sector concern, the latter highlighted by the +60% two-day slump in First Republic Bank after it reported worse than expected earnings.
ETFs backed by bullion have following a small reduction seen renewed strength with total holdings reaching 2911.7 tons, and highest since January 10. Speculators in COMEX gold futures meanwhile have been net sellers during the latest two reporting weeks but the 1 million ounce reduction has so far been small change compared with the 12 million they bought in the previous four weeks. Ahead of the May 3 FOMC meeting, the market has priced in a near 75 bps cut before yearend, and almost 100 bps during 2H24. Any signal from the Fed that goes against this assumption may act as a short-term drag on prices.
Overall, Saxo maintains a bullish outlook for precious metals with the reasons highlighted in our recent Commodity Weekly, available here. Resistance in gold at $2012 and $2018 while silver maintains support in the $24.50 area, having so far retraced less than one-quarter of the recent strong gains, perhaps supported by the findings in the recently published World Silver Survey 2023. It said the silver market last year witnessed the largest deficit on record with another deficit being projected for 2023 amid lack of supply due to limited organic growth, project delays and disruptions.
Copper trades lower as weak China demand offsets a tight long-term supply outlook
HG copper trades down around 5% on the month with weakness emerging after another upside attempt ran out of steam around $4.2 a pound. It highlights an ongoing battle between short-term demand headwinds versus a long-term outlook pointing to tight market conditions as the electrification of the world gathers momentum and miners struggle to meet future demand. This is because miners will 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 to support mining companies' profitability and their appetite for embarking on new multi-billion multi-year projects to add supply. According to Goldman Sachs, regulatory approval for new copper mines has fallen to the lowest in a decade, a major challenge as it often takes 10 to 20 years to permit and build a new mine.
The challenges the sector faces were a key focus at the recently held World Copper Conference in the Chilean capital of Santiago. The main conclusion from the conference, as expected, was that the world’s rising demand for copper will exceed supply over the next decade unless new mines are built. For now, the lower commodity intensity of the China recovery is also having an impact on copper demand, not least considering weak demand from the property, power and automobile sectors which make up around two-thirds of copper consumption in China.
As per the chart below, the metal is currently looking for support, having initially found it around $3.82/lb., the March low. Additional weakness would bring the 200-day simple moving average, currently at $3.77/lb., back into play. A reminder that it was the break above the 200-DMA back in January which helped trigger strong momentum buying all the way up to $4.3550/lb., the current cycle peak from where the price has been drifting lower since. We maintain our long-held and long-term bullish outlook for copper, but with global growth concerns attracting a great deal of attention, the upside may take longer to materialize.