The Hightower Report

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OUTSIDE MARKET DEVELOPMENTS: While equity markets in Asia and Europe are generally higher this morning, US equity indices are reflecting small losses during the initial Thursday morning trading action. The Dollar is moderately higher against most of the major currencies going into the US opening today, with minor losses to the Pound and Canadian. The US Treasury avoided naming China as a currency manipulator in their semi-annual report on exchange rate policies. The Bank of Korea raised benchmark interest rates for the first time since 2008. The President of the European Central Bank said that he did not feel that budget cuts would put the EU back into a recession. The German Consumer Price Index for June was up 0.9%, in line with forecasts. French Industrial Production for May was up 1.9%, above forecasts. The UK Producer Price Index for June was 5.1% year-on-year, lower than expectations. The UK Foreign Trade Deficit for May was 8.1 billion Pounds, higher than forecast. The only major US economic number scheduled for release today will be Wholesale Trade for May, at 9:00 AM.

GOLD MARKET FUNDAMENTALS: In general, the gold trade continues to fear a further tamping down of flight to quality sentiment, as the flow of patently discouraging news from the Euro zone this week has been accentuated by some positive US economic news flow from the US. With US ongoing claims technically forging a downside breakout on the charts yesterday, some traders jumped to the conclusion that the US economy was holding together better than recent expectations. With a pattern of gains in US equities also seen this week, an improved macro economic view was given added credence and that in turn tamped down uncertainty. The gold market apparently doesn’t know how to handle news that the White House seems to have given the Chinese a temporary pass on being tagged as a currency manipulator, perhaps because certain members of Congress are still committed to taking action against China. It is also possible that a series of interest rate hikes from Asia overnight were seen as a negative by some gold traders. While the US report schedule today only contains a Trade Balance release, that report should temporarily distract the gold market away from its recently acquired infatuation with the action in the US equity markets. Comex Gold Stocks were 10.959 million ounces up 63,802 ounces. Comex Gold Stocks have reached another new record high level.

SILVER MARKET FUNDAMENTALS: The silver bulls have to be discouraged this week as gains in a host of physical commodities this week were not accompanied by strength in silver prices. Clearly the silver market favored the flight-to-quality focus this week instead of its classic physical commodity market fundamentals. With another Canadian silver miner overnight expected to float record/increased output, the classic supply side fundamentals in the silver market could be seen as a detriment to prices, but demand not supply seems to be the dominating force in determining silver prices lately. The bull camp might suggest that a consolidation around this week’s lows might offer up support around the $17.61 area today, but the bear camp could point to the inability to sustain prices above the even number $18.00 level as a sign of ongoing weakness. Some traders think that upbeat US Fed statements overnight and news of rate hikes from Asia overnight are also serving to limit silver prices. Comex Silver Stocks were 114.502 million ounces up 602,288 ounces. Stocks have declined 11 of the last 20 days.

PLATINUM: The platinum market continues to diverge with gold and silver, and in the process has cast its lot with the recovery crowd. In other words, platinum is behaving like a classic physical commodity in the face of gradually improving macro economic sentiment. However, gains off this week’s lows have been rather muted and that leaves the bulls with only minimal confidence. With the middle of the last month’s consolidation zone seen up at $1,550, that is a logical target/resistance point for the October platinum contract. However, we aren’t sure that the trade is going to see as much favorable economic news today as it was presented with yesterday. Therefore, we are a skeptical bull for the trade today.

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OUTSIDE MARKET DEVELOPMENTS: Equity markets in Asia and in Europe have been mostly higher overnight, which helped US stock indices to post solid gains as we approach the US opening. The Dollar is mostly weaker this morning against the major currencies, although it was able to have a small gain against the Yen. As rumored in yesterday’s markets, China’s trade surplus during May was roughly $19.5 billion, much higher than forecasts and up nearly 50% from last year’s levels. Chinese exports were also significantly higher as was expected by the trade yesterday. Fed Chairman Bernanke said that the US economic recovery was on solid footing, but growth in job creation would lag. The Federal Reserve Beige Book indicated that economic conditions improved throughout all 12 of the Federal Reserve districts last month, although the pace was modest in some areas. Several US senators have proposed legislation that would put pressure on China to revaluate their currency against the Dollar. The United Nations approved a new round of sanctions against Iran, due to an escalation of their nuclear program. BP announced that a containment cap placed on a leaking oil well in the Gulf of Mexico had increased the amount of oil it was capturing. An auction for Spanish 3-year bonds was well received by the market as the issue saw solid demand. Japanese GDP was up 1.2% for the first quarter, in line with expectations. German CPI was up 1.2% during May, in line with market forecasts. Today’s US economic calendar includes April International Trade and Weekly Jobless Claims, both released at 7:30 AM. The final leg of the monthly US refunding, the 30-year bond auction, will have results announced at 12:00 PM.

GOLD MARKET FUNDAMENTALS: With a favorable Spanish auction result overnight, a much stronger than expected Chinese export tally and an upward bias in many global equity markets, it would seem like the flight to quality angle in gold is still being tamped down in the early trade today. In looking back to the prior trading session, the gold market saw comments from the US Fed Chairman that pointed to the potential for serious ramifications if the US didn’t move to get its fiscal house in order, but yet that type of news was unable to provide a positive bid for gold prices. In fact, news of another decline in South African gold production overnight of 6.2% from the prior month is apparently of little interest to the gold trade this morning. The market might also be under some pressure as a result of comments from China suggesting that the gold market was too small to garner investment allocation from the Chinese currency fund. However, since China also showed a noted rise in gold reserves held by the People’s Bank of China, it is possible that the potential lack of allocation from the Chinese currency reserve sector might be discounted. However, the main focus of the gold market still seems to be locked onto the ebb and flow of European debt fears and it would appear that we are seeing a lack of fresh anxiety on that front this morning. Comex Gold Stocks were 10.797 million ounces down 460 ounces.

SILVER MARKET FUNDAMENTALS: At least in the early going today, the silver market seems to have attached its wagon to the gold market again. Apparently moderately higher equities and generally positive action in the industrial metals markets is of little benefit to silver. In other words, the silver market is apparently seeing some selling off a further decline in flight to quality psychology. Even a higher energy market this morning has failed to provide support to silver and that isn’t surprising considering the recent heavy dependency of flight to quality potentials. Technical traders might note that July silver has remained below its 50 day moving average in the Thursday morning trade. Comex Silver Stocks were 117.630 million ounces down 831,599 ounces. Stocks have increased 12 of the last 20 days.

PLATINUM: With the platinum market showing positive progression early this morning, it is clear that platinum and copper are both behaving like physical commodity markets facing a slight improvement in macro economic expectations. However, it is difficult to suggest that platinum is poised to soar through resistance at $1,550 unless the equity market really extends on its initial gains. In short, we see short covering and a minor amount of fresh outright buying but without a more definitive end to the Euro zone debt fears, we have to suggest that bulls remain skeptical toward the upward track in platinum prices.

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OUTSIDE MARKET DEVELOPMENTS: After the initial euphoria, concerns over the EU emergency aid package have revived strength in the Dollar again overnight and that in turn has put the euro under renewed pressure. As a result, equity markets throughout the world are weaker this morning. A prominent credit rating agency stated that downgrades were still possible for Greece and Portugal, even with the new EU aid package in place. Also a series of economic numbers from China for March released overnight showed that Chinese CPI was up 2.8%, Chinese PPI was up 6.8%, Chinese Industrial Production was up 17.8% and Retail Sales were up 18.5% from year-ago levels, all roughly in-line with expectations, but apparently those readings were strong enough to prompt fears of a Chinese rate hike ahead. UK Industrial Production for February was up a much higher than expected 1.9%, while German CPI for March was up an in-line 1.0%. The main US economic number this morning from the US will be February Wholesale Trade, which is generally expected to be up +0.3%. There will also be a 3 Year US Treasury Note auction result posted at mid day today.

GOLD MARKET FUNDAMENTALS: A rekindling of EU debt anxiety seemed to surface again last night, with a number of flight to quality markets like gold, registering action indicative of ongoing debt sector concerns. While some players are suggesting that the Chinese numbers overnight were capable of prompting a Chinese rate hike, those numbers on their face could also be considered supportive to metals prices. Surprisingly gold prices come into the US action higher this morning despite a weaker tone in the Indian gold market overnight. Some gold players are hopeful that the gold market will be able to benefit even if calmer financial waters surface ahead, as many economists suggest that the Euro zone stabilization plan could eventually be considered inflationary. However, the flight to quality angle in the gold market appears to have been a dominating focus of the trade recently and therefore the ebb and flow of anxiety is likely to remain a big influence on gold prices. It would appear that the ebb and flow of equity prices is the primary guide on anxiety levels and therefore gold and equities look to maintain an inverse relationship. Comex Gold Stocks were 10.269 million ounces up 29,018 ounces.

SILVER MARKET FUNDAMENTALS: While silver is showing some minor weakness this morning and appears to be diverging with the gold market, there doesn’t appear to be a major negative tilt facing physical commodity markets this morning. Certainly silver and other physical commodity markets are seeing some spillover weakness from the weaker global equity market action and perhaps because of lingering EU Debt fears. The market did see news of increased physical silver production from a key Canadian silver producer overnight, but minor changes in physical supply haven’t been given that much consideration lately. It is also likely that noted weakness in platinum and copper prices this morning have served to undermine silver prices. From the weak initial action in silver prices this morning, the trade seems to be suggesting that silver is still being viewed as a physical commodity, instead of a flight to quality instrument. Comex Silver Stocks were 116.548 million ounces down 196,140 ounces.

PLATINUM: The platinum market is logically under some pressure this morning, as macro economic optimism is missing today. However, the platinum charts appear to be giving off the impression that up trend channel support just under the market at $1,673 might be solid. However, the platinum market looks to be tightly correlated with the direction of global equity markets and that could mean some initial weakness this morning. On the other hand, in the event that the July platinum market manages to regain the $1,693.50 level, that could be a sign that the bulls have regained control over the market. In order for the bull camp to regain control might require a June S&P trade back above the 1150 level.

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OUTSIDE MARKET DEVELOPMENTS: There appears to be ongoing Greek Debt concerns again this morning and perhaps some weakness in gold and silver prices because of this morning’s global equity market action. However, the ECB decided to leave to leave interest rates unchanged and that would suggest that the weakness in equities and precious metals markets is perhaps the result of something other than rate hike fears. With Greek credit spreads rising sharply this morning and the equity markets in that country opening and trading 5% lower, it would certainly seem like the Greek debt concerns are serving to undermine a host of physical commodity markets. Not surprisingly the market gave little attention to favorable UK Manufacturing readings or to a rise in UK Halifax home prices overnight. In other words, the markets seem to be content to embrace a negative global macro economic view this morning and that in turn has seemingly provided the Euro with a fresh downside push in the early Thursday US trade. In looking forward, the US will present initial and ongoing claims data, a 30 auction result and a Foreign Central Bank holdings report late in the day today. The market will also see a series of private chain store sales readings early this morning and while that data isn’t typically considered first tier, there are some traders expecting those figures to show noted forward progress on the US recovery effort.

GOLD MARKET FUNDAMENTALS: Apparently the gold market wasn’t that interested in the news of another decline in South African gold and non gold metal production for the month of February. With February year over year gold production dropping by more than 9% in the latest monthly figures, one might have expected gold prices to have garnered some support but instead the gold market this morning seems to be focused on the demand side of the equation. The market also didn’t seem to be that concerned about potential gold production setbacks in Kyrgyzstan that could result from a political power shift. Some players suggest that gold was simply overdone at the highs yesterday and with a slight resumption of Greece concerns and a higher US Dollar today, it is possible that a number of longs have decided to bank profits. The bear camp wants to suggest that rising Greek credit costs are set to revive the upside tilt in the Dollar, while the bull camp in gold is pulling for something favorable from either the US claims data or from the private US chain store sales figures.

SILVER MARKET FUNDAMENTALS: Typically silver might have been able to garner some spillover support from news of declining South African gold production overnight but as in the gold market, the silver trade doesn’t appear to be that interested in classic supply side developments. Furthermore, silver exchange stocks for April 6th were 116.343 million ounces, down 107,168 ounces, but again the silver market doesn’t seem to be capable of benefiting from minimal supply side issues. With the silver market recently paying a lot of attention to physical demand issues and the market also seemingly tracking both copper and platinum prices, it is possible that part of the early weakness in silver prices this morning, is mostly the result of outside market action. Traders are also suggesting that weaker equities and a higher US Dollar are serving to initially pressure silver prices.

PLATINUM: Clearly the platinum market was overbought into the prior sessions high and perhaps in need of some technical back and fill action on the charts. In addition to a slight downshift of global macro economic optimism, the platinum market also seems to be under some pressure because of a rising Dollar and renewed Greek debt concerns. In retrospect, some platinum buyers were pulled into the market early this week, because of fears that platinum production in South Africa could be disrupted because of power related issues ahead and that won’t be a supply side problem that is easily removed from the equation. In the near term, the path of least resistance is pointing downward with a near term corrective target of $1,701.

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May copper is positively positioned in the early going today. With a weaker Dollar and generally up bear macro economic views, the bull camp has more ammunition than the bear camp. Limiting the upside in copper are beliefs that Chilean production won’t be seriously derailed because of the quake. While we can’t deny some upside action today, we are uncomfortable chasing copper prices higher off the current macro economic view. However, May copper will probably see some noted support off the even number $3.40 level, but we wouldn’t be surprised if the private jobs readings serves to temper the bullish attitude a bit in physical commodity markets later this week. On the other hand, some traders are taking notice of a small number of daily LME copper stock declines and suggesting that is the beginning of a pattern and that is another example of the market spinning marginal developments into a positive event.

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With a slide below a series of key technical points on the charts overnight and a downshift in the global macro economic recovery view recently, we have to leave the bear camp in control of copper prices. With a decline in Chinese January refined copper imports seen overnight, the copper market would seem to be getting both internal and external bearish fundamental news. With a slide below the $3.20 level seen in March copper prices early this morning, we see little in the way of support on the charts until the $3.1490 level. In fact, unless the copper market can come away from the new home sales report this morning and the Bernanke testimony with a layer of fresh optimism, we can’t rule out a continued slide down to consolidation support down at the $3.10 level. Aggressive traders can be short, but one should probably tolerate any trade in March copper back above the $3.20 level.

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An improved global macro economic outlook and a slightly weaker US Dollar appear to have given the copper bulls the initial edge today. With the Chinese on an extended holiday and the copper trade seeing a very minor labor orientated supply side threat overnight, it is clear that the bull camp has more ammunition than the bear camp. However, the copper market did see some negative supply side news late last week and with the weakness see at times in the US equity markets last Friday, the macro economic optimism today seems somewhat surreal. However, seeing the Greece debt situation put under control for 30 days seems to have given the bull camp an added measure of confidence. In fact, seeing some very impressive earnings news from Barclays overnight has clearly added to the macro economic bullishness and if the scheduled US numbers can add to the bullish look on the economy, there might be little to prevent the March copper market from rising back above the even number $3.20 level. The Commitments of Traders Futures and Options report as of February 9th showed the Non-Commercial and Non-reportable combined position to be net long 11,897 contracts, which was a reduction of the net long by 6,594 contracts from the previous report. Therefore the copper market shouldn’t be held back by an overbought technical condition today.

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Optimism in the copper market had been running exceptionally high since the start of the year on expectations for industrial metal demand to recover in tandem with an improvement in the global economy. A good portion of the gains in copper leading up to the January high was based on expectations that China’s voracious copper demand would remain robust this year, while rising investor risk appetite tied to the weak Dollar also provided significant price support. But there have been a few fundamental, economic and political shifts over the last month that have changed the mood. We see a strong enough change in sentiment to suggest more of last year’s premium will be pulled out of the market and leave May futures vulnerable to an eventual test of the $2.85 price level.

Perhaps the biggest factor impacting the trend change in copper has been China’s move to tighten bank liquidity, that has escalated concerns that copper demand will soften as China’s economy cools. As there seems to be growing speculation that China will have to tighten interest rates even more aggressively during the year, the market is beginning to price in a lower demand outlook from Asia, and that could end up being a longer-term weight on the copper market. With most of the economic news in January coming in soft, it still doesn’t appear that the pace of recovery in the US economy, at least in the key copper industries of construction, transportation and machinery, will be strong enough this year to support copper prices at these inflated levels.

With the copper market in the midst of scaling back demand expectations, we suspect that it will feel a strong impact from high supplies. Copper warehouse stocks at the LME have seen a steady rise over the last several months, recently reaching a one-year high. This also raises doubts over actual copper demand. The Dollar is currently in a fairly convincing uptrend, being supported by a variety of factors, and this could be another bearish influence for copper over the near term. We also think traders shouldn’t underestimate the bearish impact from the harsh political regulatory climate. The government’s move toward imposing tighter position limits and the Obama Administration’s push to restrict proprietary trading by banks could certainly change the investment landscape and would likely have a negative impact on copper prices as well.

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OUTSIDE MARKET DEVELOPMENTS: While a number of international equity markets managed to bounce overnight, one doesn’t get the impression that global economic sentiment has actually improved. In fact, the Dollar seems to have remained in favor, in the wake of ongoing fears toward the Greece financial condition. However, the markets did see a rather robust UK house price gain overnight, but that news might have been offset by surprising comments from Trichet, who suggested that the risk of a global depression was underestimated. However, economic sentiment might improve temporarily this morning in the wake of the US 4th quarter GDP reading. In fact, Obama early in the week hinted at an improvement in the US GDP report, but the trade already seems to have baked in a strong US GDP report for this morning.

GOLD MARKET FUNDAMENTALS: While the gold market seems to remain focused on demand prospects, the track of supply side news this week seems to have generally favored the bear camp. Fortunately for the bull camp news of a rise in Chinese gold production this week, was offset by news of a jump in Indian gold imports. However, the gold trade has to be concerned about residual strength in the US Dollar, as the Dollar managed yet another new high for the move early this morning and in the process the Greenback reached the highest level since September 1st. While the trade is generally anticipating a strong US GDP reading this morning, one would have to think that the market has already factored in a large portion of that type of result. The bear camp will point out that April gold remains below the 100 day moving average of $1,088.70 into the opening today, while the bull camp might try to play up the strong leap in UK house prices and a slightly positive early track in the US equity markets. For the gold market to benefit from higher equity prices today might require equities to maintain higher prices all the way into the close today, as rallies in stocks this week have been fleeting events.

SILVER MARKET FUNDAMENTALS: While May silver has managed to recover from the low forged yesterday, the bull camp would seem to have very few themes at its disposal. Clearly silver saw some pressure this week off a growing disappointment in the pace of the US economy, and those views also seem to have been enhanced by a very confusing political environment and by noted declines in US equity prices. Like gold, the silver market also seemed to be partially undermined by the resurgence of concerns toward the Greece situation. Furthermore, silver also seems to have be weighed down by noted weakness this week, in a host of physical commodity markets. In conclusion, the silver bulls appear to need something very positive from the US GDP report this morning, but the question is whether or not macro economic optimism will be sustained after the GDP reading is absorbed. It is also possible that a strong US GDP reading could lift the Dollar further this morning and that could serve to limit the benefit of economic optimism in most physical commodity markets.

PLATINUM: With a partially oversold technical condition and hopes of some positive news from the US economic report front, we have to give the initial edge to the bull camp. Therefore close-in support is seen at $1,500 today and we can’t rule out a rise back to $1,526. However, with a slack economic outlook still generally in place, traders should not shift back into a full bull mood.

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The copper market remains vulnerable to further corrective action unless the US equity market manages to totally shake off the negative sentiment that was present at the end of last week. However, with the Chinese copper market managing a bounce last night and the weekly Shanghai copper stocks last week showing a moderate decline, the copper market should be able to find some fundamental support for prices at slightly lower levels. On the other hand, with choppy equity market action, expectations of weak US economic readings today and another significant rise in daily LME copper stocks seen overnight, the bear camp in copper does seem to maintain an edge into the early Monday trade.

We see initial support and a potential target in December copper down at $3.0515, with similar support in March copper seen down at $3.0775. In fact, with news of rising Chinese copper production seen overnight and a series of slack US NAPM readings also due out this morning, we have to give the bear camp the initial edge this morning.