Citi: Is This Gold's Breakout Week?

Precious metals (gold in particular) continue to push higher and along with copper (to the downside) hold 'center-stage' among world commodity markets. As Citi's FX Technicals group notes gold has traded above very strong resistance on the $1,350 to $1,362 range suggestng a test up to $1,434 and the next level at the 200-week moving average at $1,493. Gold is also getting close to the "golden cross" where the 50DMA will cross above the 200DMA. Such a move, if seen, would strongly suggest that the corrective low is in (at $1,182) and that a re-test of the all-time highs at $1,921 and beyond is highly likely.

Gold weekly chart: Is this the breakout week?

Gold has traded above very good resistance in the $1,350 to $1,362 range
– $1,350: 55 week moving average
– $1,353: Top of channel from the 2012 peak
– $1,362: Peak of bounce seen in October 2013.

A weekly close above this range would open up the way for a test of the pivotal double bottom neckline at $1,434. A weekly close above this latter level would complete the double bottom and suggest extended gains towards $1,680-1,685. Such a move would take us back above both the 200 week moving average at $1,493 and the horizontal resistance (previously support) from 2011-2012 at $1,523-1,527.

Such a move, if seen, would strongly suggest that the corrective low is in (At $1,182) and that a re-test of the all-time highs at $1,921 and beyond is highly likely.

Where The Russian Troops Are "Pre-Takeover" Infographic

Crimea is last week's story. Now it is all about east Ukraine. In that vein, moments ago John Kerry's latest stand up comedy routine hit the tape which contained, besides the usual laugh lines, this particular pearl:

• KERRY SAYS RUSSIA DOESN'T YET HAVE FORCES FOR UKRAINE TAKEOVER

Is that so? We provide this map showing the latest distribution of Russian military forces on the Ukraine borders so that readers can make up their own mind.

And here is another map compiled by Dmitry Tymchuk, a former Ukrainian military officer, who has established an organization, the Center of Military and Political Research on Kiev, to effectively collect and gather data about military-related facts.

Kerry concluded:

• KERRY SAYS `CONTINGENCIES' IF RUSSIA MOVED INTO EAST UKRAINE

We'll know just what those are by Sunday night. The only question: will Referendum Sunday be the new Lehman Sunday...

Secretive Chinese funds: a potent force in copper rout

* Chinese private investment funds build up big short positions - sources
* Perfect storm created for selling last Friday - analyst
* No big unwinding of Chinese copper financing deals seen - traders

hinese funds taking massive short positions played a powerful role in copper's slide to around four-year lows this week, signalling the growing force of the sector in global commodities markets.

The funds had been building up bets against copper since December, according to sources at funds, futures dealers and analysts, in a market already edgy over slowing Chinese demand and fears that credit upheaval in the world's second-biggest economy could unwind financing deals using the metal as collateral.

On Friday, funds and other speculators pounced and sold London Metal Exchange and Shanghai copper contracts heavily as they took advantage of worries over the Chinese credit market after a bond default by a solar equipment producer.

The scale of the sell off shows that Chinese funds are gaining greater sway over global commodity markets -- influence that is likely to grow given China's intention to liberalise the yuan and pilot projects for free trade zones.

China has about 700 private funds managing about 300 billion yuan ($48.82 billion), according to data provided by fund research firm Z-Ben Advisors. Some invest in both commodities futures and equities markets.

Secretive and backed by wealthy individuals, many do not have an online presence.

The funds focused purely on commodities are clustered around Shanghai and nearby provinces. According to brokerage sources, hedge funds active in China’s copper futures market include Zhejiang Dunhe Investment Co, Flowinvest China Commodities Trading, Yihui Investment and the aptly named Shanghai Chaos Investment Co.

"Many hedge funds have been bearish on the copper market for a while and have been waiting for the right time to enter," said Lian Zheng, a senior analyst from Xinhu Futures Ltd in China.

Soft Chinese economic data, weak demand, soaring copper stocks and a lack of new policies to spark demand at parliament's annual meeting this week darkened the mood, while the default of Chaori Solar triggered the "perfect storm”, he added.

London copper has lost nearly 10 percent in a week and hit a 44-month low at $6,376.25 per tonne on Wednesday, before recovering a touch to $6,443. Shanghai copper traded at 44,410 yuan ($7,200) a tonne on Thursday, not far from 4-1/2 year lows.

"Prices could fall further because there are still many investors wanting to short the market,” said Lian of Xinhu Futures.

SHORT POSITIONS

Suggestions that the selling was driven by bets of falling prices can be seen in Shanghai Futures Exchange data that shows as prices slumped by 11 percent from March 7 to 4-1/2 year lows, open interest, or new positions surged by 30 percent.

"We certainly hold short positions...at least for the first half of the year," said a source at a Chinese fund, who declined to be named because he was not authorised to talk to the media.

The fund held short positions on the LME and in Shanghai but the source said it would consider changing these if demand improved or copper prices were near the production costs of large global miners.

Chinese copper miners have also lifted hedging in Shanghai for their ore production to protect against possible price drops, increasing short positions, two mining sources said.

China is the world's top consumer of refined copper, accounting for about 40 percent of demand, but growth has slowed since last year and a global surplus of the metal is expected in 2014.

Traders estimate more than half of copper imports into China were to raise funds using the metal as collateral over the past two years, hence the market concern over the impact of Beijing's efforts to control credit conditions and rein in shadow banking.

But tighter credit markets or falling prices were unlikely to cause widespread problems in financing deals because they were structured around 90-180 day letters of credit, which means they are not affected by short-term price moves, said Sijin Cheng, an analyst with Barclays in Singapore.

"It's not like it's a margin call business and they're being forced to liquidate. It's usually a repurchasing agreement where both sides are hedged, so all the costs are known ahead of time and locked in," said Cheng.

Traders who structure financing deals said selling of copper was due to speculators not breaches of financing deals.

"Speculators are the main driver. We haven’t heard anything about defaults," said a source at a trading house in Shanghai.

BNP Paribas Favors Lead, Tin, Zinc Over Copper

BNP Paribas is reiterating its position favoring lead, tin and zinc over copper in the base-metals complex. The bank points out copper fell to its forecast of $6,500 as metric ton even sooner than it expected. BNP Paribas says it still looks for the copper market to move into a “material but far from catastrophic” supply surplus in 2014-15. The bank says it still has a positive view on demand, looking for growth of more than 10% over the next two years. However, the bank also looks for world mine production to rise by about 10% over 2014-15, with refined production outpacing mine output. 

The bank says a copper rally above $7,000 likely would present a selling opportunity. “But we do not believe the fundamentals warrant a decline below $6,000/t, either in the short term or in 2015, when the market will begin to look to the increasingly positive medium-term story,” says metals strategist Stephen Briggs. 

“Our preferred trading recommendation remains: short copper versus long a basket of lead, tin and zinc. The price ratios have already come a long way, but we expect copper/zinc and copper/lead both to eventually reach 2.5:1, with tin/copper at 4:1.”

Weaker Yuan Hurting Chinese Investors And Copper Prices – Analysts

Continued weakness and rising volatility in the Chinese yuan is being felt in the copper markets, a trend that some analysts are expecting to continue as investors adjust to higher risks and more open Chinese markets.

On March 3, USD/CNY opened at 6.1648, its highest open since July, 2013. Prices have since come down but still remain well above the mid-January lows around 6.040. As of 11:58 a.m. EDT USD/CNY was trading at 6.1371.

Marc Chandler, head of global currency strategy at Brown Brothers Harriman said the yuan’s current price represents a drop of about 1.5%, which is not a very volatile move compared to other currencies; however, he added the drop has been sudden enough to squeeze investors.

Chandler added that a popular investment vehicle was to borrow low-yielding U.S. dollars and purchase Chinese yuans and higher yielding bond investments, sometimes referred to as the “Chinese carry trade.” As long as the Chinese currency continued to make gains, investors made money, he said.

“What is important is that the (People’s Bank of China) has changed its tactics and is re-introducing some volatility in the (yuan),” he said. “There are a lot of structured products that were leveraged bets that the currency would stay strong. Even though 1% is a very small move - if you are leveraged 20 to 1, it kills you.”

Chandler said the reason the yuan is having an impact on copper prices is because the two are linked together. He pointed out investors used copper, iron ore or gold as collateral against these carry trade investment products.

“The unwind of the (Chinese) carry trade is not just about U.S. dollar/(yuan), it is also about (yuan)/commodities too,” he said.

Robbert van Batenburg, director of market strategy at Newedge agreed with Chandler and said “The unwinding of this copper-financed borrowing activity can both explain the excessive weakness in copper prices and the recent weakness in the yuan.”

Gold Climbs to Six-Month High as Crisis in Ukraine Spurs Demand

Gold advanced to the highest level in almost six months as worsening tension between Ukraine and Russia boosted haven demand, with prices heading for the best run of weekly gains since August 2011.

Bullion for immediate delivery rose as much as 0.6 percent to $1,374.69 an ounce, the highest level since Sept. 19, climbing for a third day. Gold traded at $1,373.39 at 1:04 p.m. in Singapore, poised for a sixth weekly gain.

The precious metal advanced 14 percent this year as demand for a store of value increased on the confrontation in Ukraine and concern growth in China is slowing. Crimea is preparing for a March 16 referendum that may pave the way for the Ukrainian region to join Russia. Barack Obama met Prime Minister Arseniy Yatsenyuk yesterday and said the U.S. stood with Ukraine to protect its sovereignty and territory.

“Gold should be supported as long as the situation in Ukraine remains uncertain,” said Zhu Siquan, an analyst at GF Futures Co., a unit of the Guangzhou-based company that bought Natixis Commodity Markets Ltd. “Technically, gold is starting to look a bit overbought.”

Gold’s 14-day relative strength index climbed to 70.5, signaling to those who study charts that prices may be set to reverse. Assets in the SPDR Gold Trust declined yesterday from the highest level this year, contracting for the first time since Feb. 19.

The confrontation in Ukraine has become the biggest between Russia and the West since the end of the Cold War, with U.S. President Obama and allies ratcheting up the threat of sanctions. Government officials and businessmen in Russia are readying for trade curbs resembling those applied to Iran, according to four people with knowledge of the preparations.

Massing Troops

Gold jumped 1.3 percent yesterday, the most in a week, after Ukraine warned that Russia is massing troops near its border. Crimea can be integrated into Russia within two months if its voters decide the territory should cease to be a part of Ukraine, said the region’s Premier Sergei Aksenov.

Diplomatic efforts to defuse the crisis continue today. U.S. Secretary of State John Kerry is due to meet with his Russian counterpart, Sergei Lavrov, in London, while Yatsenyuk is scheduled to speak to the United Nations Security Council.

Bullion rebounded this year even as the Federal Reserve, which next meets March 18-19, announced reductions to its bond-buying program at each of its past two meetings. Data today may show retail spending, which accounts for 70 percent of the U.S. economy, rose 0.2 percent in February from a month earlier.

Futures Advance

Gold for April delivery climbed as much as 0.3 percent to $1,374.90 an ounce on the Comex in New York, the highest price since Sept. 19, and was at $1,373.10.

Silver for immediate delivery rose as much as 0.8 percent to $21.469 an ounce and was at $21.3885. Platinum was at $1,474.88 an ounce from $1,475.50 yesterday, while palladium was at $775.85 from $776.08.

China's Spot Aluminium Stockpiles top 1 million tons

Spot aluminium stockpiles topped 1 million tonnes in China as downstream consumption showed no signs of recovery, according to a survey by Shanghai Metals Market.

Stockpiles of the lightweight metal on a spot basis in China’s four major trading regions – Shanghai, Wuxi, Nanhai and Hangzhou – rose by 79,000 tons last week to 1.07 million tons, according to the survey.

Spot stocks were 353,000 tonnes in Shanghai, 296,000 tons in Wuxi, 370,000 tonnes in Nanhai and 52,000 tons in Hangzhou, the survey showed.