Metals Report: Forever Young. Manic

There’s an old saying in the commodity business that volatility keeps a trader young. Well, if you’re trading the metals the way we are, you’re going to be forever young. Metals, both precious and industrial, made an incredible comeback Monday but this morning they are pulling back a little bit as the high volatility continues, especially ahead of important data on inflation and the Federal Reserve meeting this week.

Last week the concerns about China pulling back on gold purchases taking pause after months and the strong jobs report, caused metals to get sold off hard. Yet the realization that China’s pause is only going to be temporary and there’s still a global movement to diversify assets away from the US dollar, should keep some very solid support below the market.

In the long term of course, the industrial metals are still going to be driven by a structural supply shortage that everybody knows is going to drive prices sharply higher over the long run yet it’s the volatility in the short run and the starts and stops of the market that is going to keep the metals markets going and keep traders on edge. This will present opportunities for big profits as well as the potential for sharp losses.

Gold has been a traditional hedge against inflation and against geopolitical strife. In recent years the gold market really hasn’t reacted to inflation data because in the big picture the world was in a deflationary cycle and now with inflation looking a lot stickier and the geopolitical risk factors are making the world look like a much more unstable and dangerous place. Gold is assuming some buying because it’s the historical assumption that it will be the currency of last resort.

Because let’s face it, the threat of nuclear war is probably a more realistic fear than it has been in over 50 years. Talk that Russia could move nuclear capabilities into our hemisphere harkens back to the Cuban missile crisis back in the 1962. This comes after the Biden administration said that the US is considering deploying more strategic nuclear weapons.

GB News reported that Vladimir Putin has slammed Europe as “defenseless” against his near-5,000-strong atomic arsenal as fears over his willingness to press the nuclear button continue to mount. Talking up his stockpile at a forum in St Petersburg, the 71-year-old premier sounded bullish as he took pot-shots at the West’s ballistic back-catalogue, even including American nuclear weapons in his criticism in a scathing address to delegates. Putin said Russia had “many more [tactical nuclear weapons] than there are on the European continent – even if the United States brings theirs over”.

Regardless of what you think the risk of a nuclear war might be, investors are taking notice. Zerohedge reported yesterday that, “Trading funds based in Europe and Asia increased there are gold holdings an ETF by 8.2 tons and now globally hold a massive 3.087 point 9 tons of gold. Zero Hedge reported that, “Assets under management (AUM) by gold-backed ETFs rose to $234 billion, a 2 percent increase. AUM growth was due to a combination of inflows of metal and rising gold prices. It was the highest AUM reported by gold-backed funds globally since April 2022.

European funds reported gold inflows of 5.6 tons. This ended a 12-month streak of declining gold holdings. According to the World Gold Council, inflows were mainly driven by expectations that the European Central Bank would cut rates in early June (which they did), and the demand was primarily reflected in Swiss and German funds. They also reported that, “Asian funds reported their 15 consecutive months of gold inflows, as they have bucked the trend in Europe and North America. This reflects a broader trend of gold moving from West to East. Asian ETFs reported a 5-ton increase in gold holdings.

China has driven Asian ETF demand. According to the WGC, local gold prices rallying to all-time highs and continued yuan weakness were both drivers of gold ETF demand in the country. Japan also reported healthy inflows amid attractive local gold price gains.

North American funds reported outflows of gold after two months of rising gold holdings. North American ETFs reported a 2.3-ton decline in gold holdings in May.

Bloomberg News is reporting that surging copper prices can save at least one copper producer. “Nevada Copper Corp., a miner backed by Pala Investments and Mercuria Energy Group Ltd., has filed for bankruptcy protection, even as prices of the metal sit near the highest on record. Nevada Copper had been in the process of restarting mining at its Pumpkin Hollow project, but a series of operational setbacks, including a buildup of water underground, saw costs spiral. Its key backers balked at putting up more funds.

The collapse comes at a time when the mining industry has never been more bullish about the outlook for copper. The metal hit a record above $11,100 a ton last month and — while some of those gains have been portrayed as frothy speculation — many investors and mining executives see a deepening shortage of copper, which is essential for the decarbonization of the global economy. Despite this year’s 15% gain in metal prices, Nevada Copper has demonstrated the challenges of developing new mines on a thin balance sheet. The company — worth more than $500 million at its peak — said Monday that it filed for Chapter 11 bankruptcy in Nevada.

Speculative longs and silver continue to be near a four year high despite some ETF pullouts in silver, platinum and palladium still seem to be undervalued at this point but until we get a clear direction from the Federal Reserve those prices could be very volatile and perhaps weak. Our expectation is that the metals have the potential for a major price run after the Fed meeting is out of the way. I think that Fed chairman Jerome Powell will talk out of both sides of his mouth. I think he will leave the door open for a rate cut before the election and that in and of itself should give the metals another run. Perhaps look to position on today’s pullback. There are some option plays to take advantage of the Fed meeting.

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