Macro: Sandcastle economics
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Breakout week sees copper, gold nearing new resistance
Ole Hansen
Head of Commodity Strategy
Summary: Gold has run into some mild profit-taking in the wake of Wednesday's FOMC minutes while copper prices are presently shrugging off trade war headlines and poor macro data in favour of a more bullish, supply-interruption focus.
On Monday, our Morning Call highlighted two breakout candidates in metals. Since then, both gold and copper have rallied higher to reach their next levels of resistance. What were the catalysts behind the latest moves higher?
Gold
After almost reaching $1,350/oz, gold has since run into some mild profit taking following yesterday’s Federal Open Market Committee minutes. While the FOMC members see 2019 marking the end of their balance sheet run-off, they did not signal an end to rate rises. The market, however, did not buy into this signal with CME’s FedWatch tool showing an 85.3% chance of no change this year.
The image below highlights the key drivers for gold and their recent impact. While the December rally was driven by support from movements across most other asset classes, the rally so far this year has continued despite headwinds from the risk rallies in developed and emerging market stocks as well as high yield corporates.
The dollar has provided limited direction with the exception of the stronger yuan. Our next commodity webinar discussing current developments and the outlook for metals, energy and agriculture will be held on February 27. You can sign up here.
Gold
After almost reaching $1,350/oz, gold has since run into some mild profit taking following yesterday’s Federal Open Market Committee minutes. While the FOMC members see 2019 marking the end of their balance sheet run-off, they did not signal an end to rate rises. The market, however, did not buy into this signal with CME’s FedWatch tool showing an 85.3% chance of no change this year.
The image below highlights the key drivers for gold and their recent impact. While the December rally was driven by support from movements across most other asset classes, the rally so far this year has continued despite headwinds from the risk rallies in developed and emerging market stocks as well as high yield corporates.
The dollar has provided limited direction with the exception of the stronger yuan. Our next commodity webinar discussing current developments and the outlook for metals, energy and agriculture will be held on February 27. You can sign up here.
We maintain a bullish outlook for gold given the prospect of a weaker dollar, stock markets having run ahead of themselves to the upside and bond yields telling us all is not well across some of the major economies.
A short-term correction could see the metal revisit and test support at $1,325/oz. The upside focus, meanwhile, remains the major band of resistance between $1,365 and $1,380/oz where gold has peaked out on several occasions since 2016.
A short-term correction could see the metal revisit and test support at $1,325/oz. The upside focus, meanwhile, remains the major band of resistance between $1,365 and $1,380/oz where gold has peaked out on several occasions since 2016.
HG Copper
For many months now, supply worries have helped offset the headline risks associated with US-China trade war and weaker economic data. On Tuesday, Glencore joined other miners in flagging supply concerns from India, Peru and Africa. Adding to this, we have support from China where a stable to stronger yuan and looser credit conditions have boosted sentiment.
HG Copper has reached its first level of resistance at $2.93/lb ($6400/t on LME). Support now lies at $2.85 with the next target being $3.02/lb. The focus on supply has also helped copper buyers draw some inspiration from palladium, which despite slowing car sales has surged higher due to the prospect of demand outstripping supply over the coming year.
For many months now, supply worries have helped offset the headline risks associated with US-China trade war and weaker economic data. On Tuesday, Glencore joined other miners in flagging supply concerns from India, Peru and Africa. Adding to this, we have support from China where a stable to stronger yuan and looser credit conditions have boosted sentiment.
HG Copper has reached its first level of resistance at $2.93/lb ($6400/t on LME). Support now lies at $2.85 with the next target being $3.02/lb. The focus on supply has also helped copper buyers draw some inspiration from palladium, which despite slowing car sales has surged higher due to the prospect of demand outstripping supply over the coming year.
The latest (but still delayed) Commitments of Traders report from the US CFTC covering the week to January 29 showed a managed money short of 40,300 lots, not far from the June 2016 record of 47,100 lots. A 6% rally since then is likely to have attracted a significant amount of short-covering. Whether a long position has been established ahead of the price breakout this week, however, remains to be seen. The CFTC will not be up to date before March 8 when data covering the week to March 5 will be published.
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