METALS: Relief Rallies in Gold and Silver Should be Temporary

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GOLD/SILVER

With a noted decline in the US dollar overnight the gold and silver markets have been provided with fresh oxygen and the bull camp has been given added confidence to extend yesterday's recovery. Unfortunately for the bull camp, gold ETF holdings yesterday saw an outflow of 2,627 ounces, the 3rd straight day of outflows and ETFs have now seen net sales on the year of 2.02 million ounces. Similarly, silver ETF holdings saw an outflow of 1.1 million ounces bringing the year-to-date "net sales" to 17.4 million ounces. Apparently, seeing the US Federal Reserve chairman leave a possibility of a follow-through rate hike in September on the table has been largely discounted by commodities and equity markets overnight but some headwinds are likely to remain in place through this morning's likely European central bank rate hike. In fact, the trade is now pegging the Fed's status as "live" meaning each Fed meeting will become a debate as opposed to a preference for continuing to raise rates toward more normal historical levels. Going forward, the key driving force of gold will remain the dollar which will likely be tested today as market sentiment temporarily embraces the idea the Fed must be compelled by data to raise rates further. It should be noted that the Fed Chairman indicated the US labor market remains strong and price pressures remain which will discourage some gold buyers! It should also be noted that the most recent spec and fund long positioning in gold of 220,000 contracts was only 30,000 contracts below the highest reading since May of last year. Key support in August gold today is $1950, with closer in support of $1963.20 and resistance at $1983. While the rally in silver from this morning's weaker dollar failed to hold, we see credible support at $25.00 and little in the way of resistance until $25.30.

PLATINUM GROUP METALS

Unfortunately for the bull camp platinum ETF holdings yesterday saw a massive outflow of 28,059 ounces which is nearly a 1% decline of total world holdings in a single day. Investors were also negative toward palladium with an outflow yesterday of 1,432 ounces resulting in a single day decline in total global holdings of 0.3%. With the PGM markets clearly diverging negatively with the positive action in gold and silver yesterday, they appear to remain under a physical demand watch. However, recent production news has been supportive with large South African mining companies verifying lost output to power problems. Even demand issues favor the bull camp with recent news of a significant jump in Swiss exports. However, this week both platinum and palladium have seen noted outflows from ETF holdings suggesting both investors and physical consumers are not anxious to get long. There is little in the way of support in October platinum until $950 with a trade above downtrend channel resistance of $979.10 likely to provide only minimal short covering buying. Fortunately for the bull camp in palladium the market has balanced its technical position with 4 weeks of sideways action as that has resulted in measured, slow grinding losses from this month's highs. However, as indicated already, investors have migrated away from palladium ETF holdings and speculators are not easily enticed into the long side of futures from improving demand hope from current macro sentiment. We hesitate to continue to reiterate the point that the palladium market is record net spec and fund short but given the declines from the last COT positioning report measurement and even larger report net short is expected in the coming reports. Unfortunately for the bull camp there is little in the way of solid support in September palladium until even numbers at $1,200.

TODAY'S MARKET IDEAS

With the US Fed following through on the widely anticipated rate hike yesterday and the markets psychologically lowering the prospect of additional hikes (for now) the dollar has come under pressure which in turn has fostered modest long interest in gold and silver. However, we remain skeptical of sustained strength in gold and silver with the markets generally relying on a single force of weakness in the dollar. However, it is possible that the widely anticipated European Central Bank hike today will provide temporary selling of gold and silver, but a European rate hike should apply fresh pressure to the dollar and should set the stage for a post ECB decision bounce. Pushed into gold today we prefer selling rallies to $1,991 or from a shorter-term perspective buying August gold this morning on a setback to $1970, with an objective on the downside within the consolidation zone at $1,957.