GOLD, SILVER & PLATINUM:
While the gold market started out under pressure this week, the dollar index has forged a fresh downside breakout and should provide some support to metals prices. However, gold diverged negatively with the rest of the precious metals markets early on and it appears as if gold came under noted pressure following the release of positive Chinese PMI data Sunday night. Therefore, it would appear as if the gold market has not made the transition where prices benefit from favorable economic news. In fact, December gold in the 20 minutes after the Chinese data was released had a high to low slide of $8 per ounce. While it will take a number of days of consistent inflows to gold ETF holdings to revive investment hopes again gold ETF holdings on Friday did increased by 43,946 ounces for the 3rd straight day of gains. While physical production has not been a major driving force for gold prices of late, reports that gold production in Australia is running at a record pace following very strong production in the quarter ending June highlights the impact of high prices. Australia is the world’s 2nd largest gold producer with output for the 2019-2020 production year reaching 328 tonnes. Nonetheless, gold is likely to retain “support” on the charts from the Federal Reserve shift last week with several large financial entities releasing bullish gold price forecasts in the wake of the Fed symposium last week.
Clearly the change in Fed policy severely damaged the price structure in bonds and notes last week as the flow of US scheduled data was not strong enough to justify such a washout. In fact, last Friday’s US scheduled economic data was a classic example of mixed results with personal income and spending offset by a disappointing Chicago purchasing managers index. However, both bonds and notes appear to have found some measure of fundamental and psychological value on the charts which in turn coincide with credible chart support levels. Treasury prices have given back some of the bounce/gains from last Friday, perhaps off analyst predictions that the Fed will attempt to hold interest rates down which are nearing the highest levels of the post virus outbreak timeframe.
It would appear as if the Dollar has settled back into the downtrend started back in March at the same time that the Euro and Swiss Franc appear to have settled back into the uptrends they started back in March. In our opinion the shift in the Fed clearly sends a signal to the market that the dollar will be headed lower in the near term with currencies making gains on the dollar without macroeconomic or interest rate differential favor. The Dollar downside breakout early this week sets the stage for further depreciation and general embracing of the idea that the Dollar is poised for a long-term decline.
Global equity markets early this week were mixed with Chinese, Australian and Hong Kong down by less than 1/2% and the rest of the world posting gains just under 1%. In addition to new highs in certain US market measures early on, the trade was seeing fresh speculative lift from news that Berkshire Hathaway made a major investment of $6 billion in Japanese trading houses. Limiting the market in the early going is the announcement from American Airlines of a reduction in its October schedule and talk that China has introduced technology export laws that could destroy TikTok.
As would be expected favorable Chinese PMI data sparked an upside breakout in copper even though the official manufacturing PMI reading down ticked from the prior month. However, the trade apparently sees the non-manufacturing PMI improvement as a sign that the economic recovery is broadening. Adding into the upward tilt are reports from a Chinese copper processing company suggesting copper ore will remain tight ahead but copper futures should also benefit from continuing strong iron ore imports. In fact, the metals trade in Asia has labeled the recovery in China a “V” recovery and therefore fresh two year highs early today are not surprising.
Despite a negative price reaction to last week’s hurricane, crude oil prices early this week are showing positive action with a portion of that optimism the result of news that Sinopec expects Chinese first half fuel demand to gain over year ago levels despite the protracted virus lockdown. Crude oil was lifted by favorable equity market action, new lows in the US dollar and a bullish long-term oil market forecast from Goldman Sachs. Certainly, US Gulf of Mexico oil output is recovering but remains below pre-hurricane levels into the beginning of this week. We suspect that the bull camp is seeing minimal lift from news that US oil rigs operating last week declined by 3, with the total oil and gas rig count at the middle of this month reaching a new all-time low.
Drier than expected weather in Iowa is helping to spark more aggressive fund buying as traders believe the poor weather during critical development has hurt soybean yields, especially in Iowa and Illinois. The five day forecast shows very little rain for Iowa and Illinois and traders are growing concerned that plants will just shut down early. Crops in these areas have received very little rain in the last 14 days. On top of yield concerns for the US crop, news that the Brazil government eliminated the import tax of 8% for soybeans and other Agricultural products would suggest that Brazil may even need to import soybeans from the US. It is still dry in central Brazil and current forecasts point to more below normal rainfall into September. This could delay the start of soybean plantings which normally pick up into the third week of September. Much below normal temperatures are expected into mid-September for Iowa and Minnesota and this may also develop into a potential issue.
Reports of less rain than traders have expected has helped to provide underlying support, and traders are likely expecting a further decline in crop conditions for Monday afternoon’s weekly update. The state agriculture secretary of Iowa indicated that the state is facing its most widespread drought since September 2013. The US drought monitor indicates 96% of Iowa was abnormally dry as of Tuesday, up from 88% a week earlier. About 61% of the state is in a moderate to exceptional drought, up from 45% a week ago. Keep in mind that 9-10 million acres of Iowa corn were impacted by the windstorm and with the very fast dry-down in August, there is talk of big loss in yield, and even some talk that some of the fields are being declared a total loss and there have been reports of farmers out destroying the crop.
December wheat closed lower on the session Friday but the market is up to the highest level since April 23rd at the start of this week. The market managed to rally 13 3/4 cents for the week last week. December Kansas City wheat closed 15 1/2 cents higher on the week. While the US dollar was sharply lower on the day, traders see Black Sea region wheat as cheaper than US wheat, and world wheat supply remains plentiful. Egyptian officials indicate they have strategic reserves of wheat to last six months. For the Statistics Canada stocks report as of July 31, traders see all wheat stocks at 5.7 million tonnes (5.0-6.6 million range), as compared with 6.04 million tonnes last year.
The technical action turned bearish on Friday as October hogs gapped lower on the opening in the market closed sharply lower on the day. While pork values have been choppy, traders are nervous that pork cut-out values will come under selling pressure into September as slaughter levels pick-up steam. The USDA pork cutout released after the close Friday came in at $70.64, down $1.71 from Thursday and down from $72.96 the previous week. This was the lowest the cutout had been since August 11. The USDA estimated hog slaughter came in at 481,000 head yesterday. This brings the total for the week so far to 2.388 million head, down from 2.391 million last week at this time but up 7.9% from last year.
Increasing cattle supply is expected ahead as a combination of very heavy weights and an abundant supply of market ready cattle on feedlots could cause a surge in production in September. Hot and dry conditions in the West and a sharp drop in pasture and range conditions could also help boost non-fed cattle slaughter. October cattle closed sharply lower on the session Friday and the selling pushed the market down to the lowest level since July 28. The USDA boxed beef cutout was up 34 cents at mid-session Friday and closed $2.14 lower at $229.40. This is the first time the cutout has gone down since August 5. The USDA estimated cattle slaughter came in at 116,000 head yesterday. This brings the total for the week so far to 588,000 head, up from 586,000 last week at this time but unchanged from a year ago. Cattle slaughter for the week reached 654,000 head, up from 653,000 a year ago.
Cocoa’s 2-day updraft to finish last week’s trading has lifted prices well above the early August consolidation and far above their 3 major moving averages. While the market is near-term overbought, cocoa has found support from both the supply and demand sides of the market that should help it to remain well supported on any near-term pullbacks. December cocoa pushed up to the highest level since February 28th. The market rallied in four of the five trading sessions last week to close up 114 points or 8.9% for the week. The sharp break in the Dollar resulted in a 1-week high in the Eurocurrency, which benefited cocoa prices as its recent strength will make it easier for European grinders to acquire near-term supplies. Keep in mind that the Euro zone accounts for over 30% of global cocoa processing, and does so without a domestic source of cocoa beans.
With the Brazilian harvest nearly completed and their crop priced-into the market, coffee should benefit from Central American supply issues and improving global demand prospects. December coffee closed sharply higher for Friday’s trading session as the buying pushed the market up to the highest close since March 25th. The market ended 655 points higher for the week which was a second positive weekly result in a row. The Brazilian currency gained more than 3% in value and reached a new 2-week high, and that provided significant carryover support to coffee prices as a stronger currency eases pressure on Brazil’s farmers to market their near-term supply to foreign customers. Near-term supply in Vietnam has become fairly tight with more than 2 months to go before their harvest begins, and that has provided additional support to the market as early forecasts are calling for them to have lower production during the 2020/21 season.
The drift lower for December cotton since the hurricanes hit could be a sign that the hurricane damage has already been priced-in. The market found some selling pressure in reaction to Hurricane Laura largely missing cotton growing areas when it rolled through last week. The market was well supported last week by anticipation of the storms, but also by optimism regarding US export prospects after China and the US reported a successful meeting regarding the Phase 1 trade agreement. However, the USDA is forecasting a strong US crop for 2020/21 and large US and world ending stocks, so the market may find it difficult to build on the current uptrend. Texas’s crop conditions have improved over the past couple of weeks, and the market may have seen the worst of the news for the crop. Strength in the other grains helped to support solid gains overnight.
The sugar market has been unable to benefit from significant carryover support from outside markets, and that may be setting sugar up for a correction. October sugar closed 17 points lower for Friday’s session after a higher opening, which left the market down 23 points for the week for a second negative weekly result in a row. Sugar “should” have received a significant boost from a more than 3% gain in the Brazilian currency that eases pressure on Center-South mills to favor sugar production over ethanol production, while energy prices were relatively stable going into the weekend. Archer Consulting said that more than 22% of next season’s Brazilian sugar exports and 5% of their 2022/23 sugar exports have already been hedged due to the sharp decline in the Brazilian currency which reached a record low in May.
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