Weak Copper Price Action Spills Over To Silver And Gold

The Chinese data-driven rally in copper earlier this week has been sharply reversed today with silver and ultimately also gold suffering as consequence. The reasons behind the copper weakness are rising warehouse inventories at a time of uncertainty about what impact US Federal Reserve tapering will have on demand in the US but also in emerging economies currently reeling from a steep drop in the value of their currencies.

Stockpiles in LME warehouses have been rising for a fifth day in a row following eight straight weeks of declines and it comes at a time when a robust rally throughout August has been running out of steam. Production of copper has increasingly been catching up with demand and will result in a rising global surplus over the next couple of years, according to Goldman Sachs.

Copper was and continues to be an important driver for silver and the rally in copper during August was one of the main reason underpinning the relative outperformance of silver versus gold. With this support, at least for now, reduced, silver will have to look towards gold for support, something it will find as long as Middle East tensions remains elevated. The area of support to look for now on copper is just below USD 321.20-322.10/pound as we have seen this area play out as both support and resistance on several occasions over the past few months.

High grade copper, cont. chart

Having dropped by more than 3.5 percent today, silver is now getting close to the first line of support at USD 23.25/ounce followed by USD 22.83/ounce which represents the 38.2 percent retracement of the August rally.

Spot silver

Support for gold remains fairly solid given geopolitical tensions. But as we move closer to decision time for the US Federal Reserve, some nervousness may start to emerge leaving it more exposed to the downside. After failing to reach a new high yesterday, the risk of a revisit to Monday's low and potentially the USD 1,350/ounce support has risen.

With strike action in South Africa (now close to being resolved) hitting the physical market in terms of demand and lower supply, the institutional investor remains lukewarm with flows into Exchange Traded Products not picking up while the increase in net-long futures positions has so far primarily been driven by short-covering.

Spot gold