Heavy Metal

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Gold

Naturally Gold and precious metals have floundered the past year due to surplus Oil, accelerating commodity deflation and Chinese manufacturing weakness.  Gold is 40% cheaper than 4 years ago. With rising middle eastern military conflicts, surging Chinese Gold reserve demand and the strongest seasonal 3 month period of the year one might have expected a strong demand led surge, yet Gold remains in a downtrend of lower highs and lower lows.

 China recently reported a 57% jump in their Gold holdings (last reported in 2009), yet they remain grossly underinvested. While most free floating currency countries, like Germany and the US, hold 60 to 70+% of their foreign reserves in Gold, China has less than 2%. With China holding far more foreign exchange reserves than any other country on the planet we should expect a steady conversion of trade surplus and Treasury holdings transmuted into Gold purchases for years to come.  

Some analysts claim the strong US Dollar has hurt Gold this summer. The next chart refutes that weak reporting by revealing that the Dollar has been sideways to lower since April.  The greatest near term negative factors have been falling Oil and Chinese slowing. Oil fell from the $65 a barrel in early May to $38 in August. During the same period Gold fell from $1230 to $1080. A very strong correlation! We expect the current upward pressure on Oil back to $50 and higher Gold due to Russia’s Syrian escalation to continue near term.Dollar 10-02-15

Why does Gold continue to be a lousy longer term investment over the past 4 years?  A weak global economy, aging demographics and deflating  commodities are the primary culprits. When will Gold finally trend higher?

GC weekly 10-15

Gold monthly 10-15

Clearly Gold and all precious metals will be flying into headwinds with the Global economy slowing, surplus Oil and inflation near zero. There are a signs of a longer term reversal: 1) Technical sentiment is once again near favorable levels where Large Spec Hedgers having liquidated most of their longs (excessive negative sentiment is Bullish) and Commercial hedgers have covered most of their short hedges (see chart below).  2) A strong jobs market and service economy with record job openings provide some fundamental evidence of economic growth pulling the weak industrial sector higher in 2016. As long as Oil prices stay above $40 then Gold may show signs of bottoming. With Russia beginning a long sustained attack on Syrian rebels it’s increasingly likely a temporary floor in Metals and Oil may have arrived. $1080 to $1100 is major support. A move above $1,170 will turn the short to medium term trend into an up mode. Should price exceed 1170 we would look for 1200 to 1230 as the next zone of resistance.

Gold 9-30-15

Palladium

For the same reason Platinum is the weakest metal in recent weeks, Palladium has become the strongest. Diesel cars use Platinum while most gasoline cars use Palladium in their catalytic converters. Volkswagen has admitted to the devastating news of falsification of emissions data with its diesel engines. If VW goes bankrupt or stops selling diesel cars, then demand for Platinum will fall and consumers will switch loyalties to Palladium with unleaded gasoline engines. Palladium has taken off like a rocket over the past month and while its too late to Buy until there is a sharp correction, we are still encouraged that Money Managers have not begun to Buy after being excessively negative. 

Palladium 10-15

 

Platinum

Platinum has been the mirror image of Palladium over the short term reaching new multi-year lows while Palladium surges to multi month highs. As mentioned the massive recall and legal woes of VW has led investors to liquidate Platinum expecting platinum consuming diesel engines to be replaced with Palladium consuming gasoline engines. The news here is still quite fluid as the magnitude of recall costs and future demand will ebb and flow in the months to come as a plan is articulated and the lawsuits filter into the headlines. This market is too volatile to touch. Sentiment is low enough for a strong bottom, but VW news related liquidation by Large Spec hedgers is still possible (green line below). 

Platinum weekly 10-15

 

Silver

The recent oversold commitment of trader positions we show for Gold, Palladium and Platinum also extends to Silver. Excessive liquidation of Commercial shorts and Large Spec long positions indicated as of August that price lows were near (see chart below). As with all the metals, a further deterioration in China and sharp declines in Oil toward $40 would likely trigger new lows in Silver. We expect the commodity deflation cycle to bottom out by early 2016 and allow Silver to rebound. It will take a large Silver rally above $18.50 before the medium term trend turns up. Short term trends remain higher until $15.36 support is broken.

Silver weekly 10-15

Copper

While copper is not precious and responds more to the status of the industrial economy, it remains somewhat tethered to the other metals. Money Managers became very negative in August which supported the mild rally we have seen since. However, Copper is very sensitive to The China Syndrome: Copper will rise and fall with the economic news emerging from China. The news has been negative in the Chinese manufacturing sector which has contracted at the sharpest pace in over 6 years. With China accounting for almost 40% of  world Copper consumption it’s easy to understand that price action and economic reporting is highly correlated. With China imports of Copper falling to 6 year lows there are no fundamental reasons to expect a strong sustainable appreciation in price. Copper is still vulnerable to a dip under $2.00 and the recent $2.20 to $2.50 trading range will likely be pivotal in triggering a new breakout trend. 

Copper weekly 10-15

Copper 10-15

 

As long as Copper prices remain under 2.50 there is no fundamental reason to expect anything more than a relief rally from technically oversold conditions until more pronounced seasonality returns in February and particularly when Large Specs liquidate  more of their excessive net long positions. Copper demand is weak, world growth is slowing, seasonal demand is slow into late November or early February and institutional traders have elevated copper holdings relative to the low level of prices. We remain cautious on Copper.

China copper imports

China, Oil and the general commodity laden emerging markets are the key factors to watch going forward.  Hedger positions and sentiment in the charts above support medium term uptrends, but we suspect limited upside action until signs of global growth acceleration filters into the economic reporting cycle.

 

 

 

 

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