Gold: US Rate Hike Expectations Keep Gold Pressure
Gold prices tumbled lower over the week as the market has increased its expectations of a December rate hike, as shown by a narrowing of the spread between the 2 and 5 year treasury yields. More importantly though, is the uptick in expectations for the Fed’s rate path of Q1 2018, with the Fed fund’s futures showing a jump in pricing for the March 21st meeting.
In a note released this week, investment bank JP Morgan has advised it client to stay “tactically short” in gold over the majority of 2018, expecting a more aggressive Fed tightening cycle, which should keep gold subdued. Citibank on the other hand, point out the upside risks from rising geopolitical tensions linked to elections and political events, terrorism and military conflicts.
Gold prices are currently probing beneath the trend line support of the rising channel that has framed price action since the December 2016 lows. The next key technical level will be a test of the 50% retracement from those lows with a deeper structural level sitting alongside the 61.8% retracement around 1205.68 (June 2017 low).
Silver: Precious Metals Sinking
The uptick in US rate hike expectations has sent silver cratering lower this week as investors have begun squaring their positions in the precious metals, bolstered by speculative selling heading into the Fed’s December meeting.
Silver has finally broken down out of the symmetrical triangle pattern which has framed price action for much of the year. Price is now fast approaching key support at the 15.6552 – 15.80007 level which has been solid support over the last two years. A break here will open the way for a run down to the year to date lows.
Copper: Weak Chinese Demand Expectations Weigh on Price
Tracking the broader commodities move, copper prices collapsed this week, cracking under the pressure of weakened demand expectations for China and heightened Fed rate hike expectations. Copper inventories have remained at frustratingly elevated levels this year despite supply disruptions in Chile and Indonesia. Tuesday saw copper’s worst daily move in around two years due to a reported large inflow in the London Metal Exchange.
Alongside this, concerns are growing regarding China’s crackdown on the domestic property market which plays a big part in copper demand in the country. Indeed, premiums on physical delivery to China have been at low levels this year, suggesting that the demand from China is not straining supply.
The level of bullish positioning in the market is also playing a role in the move. The large speculative long position that has built up over the year has reportedly spooked new investors from putting on bullish bets as they fear the position will be unwound into year end. This week’s move is indicative of the start of this unwinding which, with the Fed widely expected to raise rates next week, is likely to deepen.
Copper prices are currently challenging the broken 2015 swing high which will be a key pivot. A break back below this level should encourage momentum sellers bringing the 2.762 level into focus which is the retest of the broken bearish trend line from 2011 highs along with the broke initial 2017 high.
Iron: Rising Port Inventories Weighing on Price
Iron ore prices also fell victim to lower prices this week as a rise in Chinese port inventories highlighted subdued demand. Chinese ports have seen a 1.2million tonne increase in port inventories over the last week linked to the crackdown on the country’s property market along with ongoing issues in the steel market.
Interestingly, this week Vale SA, the world’s biggest iron producer has said that if speculators attempt to drive the price of iron higher again, it will flood the market to drive prices lower.
After trading all the way back up to the $73 mark and testing the August swing low, prices have since reversed sharply lower trading back down to below $70. The next key area of support for iron will be a retest of the breakout base around the $64 level.