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.
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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.
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.
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