‘Dangerously high’ gold prices as copper also soars

Gold prices at highest since mid-August.

Gold prices settled at their highest since mid-August on Monday, with prices shaking off pressure from strength in the U.S. dollar and Treasury yields to inch higher, extending last week’s rise of more than 5%.

What’s happening

Judging by the action in gold, U.S. traders are “increasingly expressing their domestic doubts about the American economy by betting on bullion,” Adrian Ash, director of research at BullionVault, told MarketWatch. New York is leading this rally in precious metals through Comex derivatives, rather than exchange-traded funds or physical trade, he added.

Ash also pointed out that most of gold’s gains so far this month have “come in short bursts, either at the start of New York trade or a few hours later when London then closes, leaving the action in Comex to set prices.” That could “risk creating an air pocket below current prices, with gold slipping back if there’s no follow-through from stronger physical buying in wholesale bullion,” he said.

Still, “last week’s break of gold’s 2022 downtrend, plus the surge back through what had been failed support around $1,680, makes the technical picture look very supportive” for the precious metal, said Ash. Asian household demand also looks supportive, he said, given heavy wedding-season purchases of gold following a good Diwali holiday in India and ahead of the key Chinese Lunar new year.

Metals prices advanced sharply last week as the U.S. October consumer-price index report came in softer than expected, sparking a sharp rally in stocks, bonds and gold, among other assets.

The remarks “served as a reminder that gold’s huge gains last week were driven by sentiment that the Fed will be less aggressive with its future upcoming interest rate decisions rather than on any firm fact,” he said.

‘Dangerously high’ gold prices

Rowling pointed out that pace of last week’s gains, “in which gold climbed more than $100 an ounce, leaves gold open to some profit-taking this week as investors reassess where the true value of the precious metal lies.”

“While the latest inflation figure out of the U.S. was undoubtedly encouraging, rising consumer prices remain an issue that the Fed looks determined to get back under control through interest rate rises,” said Rowling.

Copper Soars by Most Since 2016 on China Reopening Hopes, Dollar Slump

Copper soared by the most since 2009 as optimism about a relaxation in China’s Covid policies and a steep decline in the dollar set off a scorching run-up across industrial metals markets already facing tight supply.

Copper closed 7.1% higher on the London Metal Exchange, while zinc rose 5.7% and aluminum rallied 4%. Mining equities also jumped, with Anglo American Plc surging 11%. A slumping dollar boosts purchasing power for commodities consumers in countries like China, where the yuan saw its biggest rally since 2005.

Metals have been caught for months in a push-pull between the soaring dollar and global economic gloom, on the one hand, and chronic supply constraints that have gripped markets including copper and zinc, creating the risk of whipsawing rallies if demand conditions improve.

Still, the strong US currency and macroeconomic pressures from rising interest rates to the debt crisis in China’s property sector and Europe’s energy crunch have kept prices under pressure for months -- even after Friday’s surge, copper is only at the highest since mid-September.

This week, sentiment toward China shifted rapidly as a flurry of market-friendly headlines -- along with unverified talk that China is poised to exit its strict Covid Zero policy -- helped unleash a sharp rally in Chinese equity markets. Adding fuel to Friday’s rally on the LME, the Bloomberg Dollar Spot Index earlier plunged by the most since March 2020 in the wake of US data showing a rise in new jobs, but an increase in the overall unemployment rate.

Copper rose as high as $8,121 a ton, before closing at $8,099 a ton, in the biggest daily gain since January 2009. Protests at MMG Ltd.’s giant Las Bambas mine in Peru also stoked concerns about supply, after the company said it’s been progressively halting operations since Oct. 31 due to blockades at the mine.

“Despite the recent announcement by MMG that it plans to double copper production from all its operations by 2025, recurrent and ongoing disruptions from indigenous communities at Las Bambas have resulted in around 18 months of outages over the last six years,” Colin Hamilton, managing director for commodity research at BMO Capital Markets, said in an emailed note.

Supply worries are also rising to the fore in the zinc market. Stockpiles in Shanghai Futures Exchange warehouses posted a 44% weekly drop to 24,925 tons -- nearing a record low struck in 2018 -- in a fresh sign that buyers in the world’s largest commodities market are running critically short of the steelmaking metal. SHFE contracts for nearby delivery have also been trading at huge premiums to later-dated futures, in a condition known as backwardation that’s a hallmark feature of a supply shortage.

Despite the zinc market’s tight dynamics, prices had tumbled during a broad retreat in metals markets as worries about demand mounted in recent months. Now, sentiment is shifting rapidly in China, with investors across financial markets hoping that the country’s coronavirus containment measures will be relaxed.

“We wouldn’t expect an easing to materially take place until Q1/Q2 at the earliest,” Natalie Scott-Gray, senior metals analyst at StoneX Group, said by email. “However, where we do suspect to see more optimism is coming from falling SHFE stocks in China, strong import premiums and, indeed, month-on-month increases in imports of the base metals.”