Precious metals: expected correction

The precious metals are set for a correction as the short term USD gains on strong and better-than-expected US jobs data.

1）Market performance

The COMEX gold index was last quoted at $1875.0 an ounce and silver at $27.49 an ounce.

Strategically, the top of the COMEX gold market was seen in August last year;What we are currently running is a big B wave rally, and the rally is expected to continue in the volatility into September.Recently, industrial production has adjusted sharply, and the inflationary drivers appear to be waning.

Precious metals in Shanghai followed the Comex market this week.Technically, the DXY is strongly supported at 89.2 and is showing a rebound.The precious metals are set for a correction as the short term USD gains following yesterday's strong and better-than-expected US ADP employment data.But it did not change the pattern of B wave rise.We speculate: B wave will continue to September;It then peaked and fell back.

AU2112 contract today at 382.62 yuan/gram, a weekly decline of 8.76 yuan;AG2112 contract 5630 yuan/kg, weekly decline 95 yuan.

2）. Influencing factors and analysis

Start with the dollar index.Technically, the dollar is rebounding;On the news, the market is focused on the US non-farm payrolls data tonight.

From the perspective of the epidemic, inoculation accelerated in the United States, and the economy and employment heated up rapidly.The president promised that by the Fourth of July, economic activity in the United States would be fully open and 70 percent of Americans would be vaccinated.The United States appears to be reaching herd immunity levels by the fall.

From a financial point of view, earlier, the U.S. government approved a $5 trillion plan to combat the epidemic.President Biden recently proposed a $6 trillion budget for the new fiscal year (2022).These include infrastructure, education and health.Huge fiscal support has been, and will continue to be, the driving force behind global inflation.This depresses the dollar;A strong economic recovery, in turn, will help strengthen the dollar.

In monetary terms, the Fed's policy in the past has been to keep the economy and jobs growing faster and to keep the federal interest rate near zero until inflation is above 2 percent.But the minutes of the April Fed meeting suggest that the strong pick-up in economic activity will prompt discussion of tighter monetary policy.Some officials believe the Fed will begin discussing tapering QE in the next few meetings.

Historically, the dollar has tended to go into strong cycles during strong Democratic administrations.This is consistent with its ruling philosophy.The strong dollar is finally back with a strong recovery in the US economy and employment.This sets the stage for a bearish pattern in precious metals.

On the inflation side.Since the middle of May, the "mandarin industrial goods index" has shown a large oscillating adjustment, and inflation has shrunk.

COMEX crude oil, although a strong performance, but there is a downside potential.On the Iranian nuclear talks, we believe there is a high probability that an agreement will be reached, which could lead to an increase in Iranian crude oil exports (up to 2 million b/d).Slight increases in OPEC+ oil production in May, June, and July, totaling 1.14 million BPD;Later, the maximum was 2 million b/d.Meanwhile, Europe and the United States are recovering well, despite the worsening epidemic in India and South Asia.Global consumption is expected to grow by 5.7 million b/d in 2021, according to the IEA.The supply gap is 1.4 million b/d.As a result, crude oil is trending upwards, driven by the summer driving season and the fall peak season.

From the industrial index, the recent period, the bulk commodities have fallen sharply and oscillations.Roaring industrial markets and a stern warning from the National Congress are the main reasons for the cooling.Summer is originally the consumption of industrial products off-season, now the fall is suitable for "seasonable".What does the future hold?We believe that: industrial product index in May and June into the adjustment, the latter still has the potential to rise.It is estimated that the first rebound peak in September, the second rebound peak is expected to appear in February next year.

Finally, look at risk factors.Recently, global economic and political uncertainty has declined.

On the economic front, the US non-farm ADP data for May beat expectations, with 978,000 jobs added.The US ISM services index (64) hit a record high in May.America, it seems, is well on its way to recovery.That would strengthen the dollar and long-term Treasury interest rates.

On the political front, the situation in the Middle East remains the focus.The Iranian nuclear talks are nearing completion.In addition, the dynamics of relations between China and the West, and between Russia and the United States, remain to be watched.At present, China and the United States have started normal communication in the economic and trade fields, focusing on whether to solve the tariff issue in a pragmatic way.

3）. Conclusions and strategies

In terms of strategy, we have two arguments: 1. The gold top appeared as early as August 2020 and rose for 5 years to an all-time high!2. According to the pattern of the Democratic administration, the dollar will eventually begin an upward cycle.As a result, precious metals remain a big bear in strategic terms.

Now the precious metals market is taking a short beating.Could this be the start of a turnaround?Relay adjustment?We are inclined to expect the big B surge to continue.That is because the US economy will need huge fiscal support and ultra-loose monetary policy before it can fully recover.Our guess is that Fed tapering will come as early as the fourth quarter, and precious metals will peak and fall around September.