Tight Global Supply Offsets China Demand Concerns in Copper

Precious Metals

While it is a somewhat rare condition, gold and silver prices are sharply higher at the same time US equities are showing a strong opening. Looking ahead it is unclear when and if US scheduled data will be released, US/Chinese trade relations are contentious again and the Middle East “peace deal/hostage swap”
is largely ignored. Therefore, precious metals continue to see ongoing flight-to-quality buying off the trade war and are not being held back by recent strength in the dollar. Looking ahead, US Chinese relations will likely be the main focal point of the precious metal trade with the shutdown of the US government a bullish sideline influence.

Copper: While we would not characterize US/Chinese trade relations as easing this morning (as indicated by a Bloomberg article overnight) the copper trade apparently sees the softening tone of the US president from the weekend as supportive. As indicated already Chinese September rare earth exports dropped 31% and that stoked the ire of the US president on Friday, which in turn sparked the threat of reciprocal tariffs from China. However, it seems that trade barbs are not pressuring copper prices at present. Not surprisingly, copper is mostly discounting news that Chinese copper concentrate imports dropped by 6.2% in September, but that drop is mitigated by strong imports in the previous two months. It is also possible that the slight dip in Chinese copper concentrate imports in September was the result of the Indonesian mine problem and not because of a dip in demand. It should be noted that Chile has seen a significant improvement in its overall foreign trade as Chileancopper exports are already benefiting from the Indonesian mine collapse. In other words, the copper trade has shifted focus toward Chilean supply which is likely to be a long-term condition. With US copper futures prices this morning trading $0.21 above last Friday’s low, and Shanghai copper up 1.1%, the bulls hold serve this morning. In a longer-term background story, the LME has announced further efforts to develop sustainable metals premium pricing for LME Brands and that could increase demand for cheaper copper grades that are not sustainable. Sustainable pricing might foster better environmental conditions that comes with the cost of inflation Adding into the bullish fundamental argument for copper this morning are predictions from Deutsche Bank that world copper mine supply will decline in the fourth quarter. Apparently, the trade believes global
supply tightness will countervail fear of weakening Chinese copper demand. While significant volatility leaves initial support suspect and far off the market, see initial support at $5.0145 in December copper. On the other hand, the inability to hold the overnight low at $4.9225 could spark an avalanche of fresh selling. At least in the early action today we see a minimal upward track but without sustained equity market gains and in the event of any harsh fresh US/Chinese trade dialogue prices could suddenly resume the aggressive washout seen late last week.

Gold: While daily gold ETF holdings last week saw a long string of daily inflows broken, Friday gold ETF demand recovered with the purchase of 163,493 ounces of gold and an explosive inflow to silver ETF holdings of nearly 2 million ounces! Furthermore, gold ETF holdings remain well above the highest level seen since early 2022. Even though the US president toned down his harsh rhetoric toward China from Friday with weekend comments suggesting he did not want to “harm China”, seeing September Chinese rare earth exports fall 31% (from the previous month) clearly triggered the US President! However, the US presidents’ threat of 100% tariffs on China because of rare earths export restrictions, combined with China’s threat of reciprocal tariffs on any100% tariff, clearly suggests the spiraling trade war is alive and kicking! It is likely that gold and silver will continue to surge into what we expect to be historical blowoff tops. In retrospect, aggressive extended inflows to both gold ETF holdings suggest to us that small investors are rushing into the markets. Furthermore, with the Bank of America forecast of $5,000 per ounce gold we suspect further waves of speculative buying ahead. In other words, weaker hands are moving into long positions which can create wild trading on chart support violations. Furthermore, we see the dollar somewhat vulnerable to corrective action early this week and further treasury market strength and that suggests outside markets will be supportive. Last week outside markets provided headwinds for gold and silver! Another strong bullish for in the trade early today is trade talk that silver in a short squeeze as that has already propelled the silver market toward all-time highs.

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