We’ve discussed the first quarter commodity rally in detail over the last two weeks. Our general opinion has been that these rallies are temporary as commodity producers use this opportunity to hedge forward production at decent prices for the first time in over a year. This week, we’ll discuss the metal markets – gold, silver, platinum and copper. We’ll detail how we used the Commitment of Traders report to pinpoint the market’s bias as well as how to factor external shocks into the current picture. Finally, we’ll provide some support levels as we look to take profits on the current decline.
We’ve discussed at length over the last two weeks that commercial producers in most of the commodity markets have come out in force to unload their future production on the first quarter commodity rally. Fore example, we’ve noted that gold producers haven’t been this bearish since 2013 and that the crude oil glut would take more than a year to work through. See, “Gold, Oil, Grains – Was that It?” for the background we discussed last week. Last night’s tragedy in Brussels has added a bit of a boost to the precious metals as expected. If this boost is insufficient to force short covering or, attract new buyers, it’s over until prices decline.
Has the commodity rally that began just before the New Year ran its course? We posed the argument in early January that the technical breakout in interest rates would point towards the general economic activity of 2016. The interest rate breakout higher, towards lower rates would ultimately show itself in the form of deflation, which would in turn, weaken the commodity sector. I believe we are at a major inflection point for the year’s trading.
There is a major battle brewing between the bulls and the bears in the metal markets. Arguments on both sides are full of conviction and weight. Even more importantly, traders are putting their money behind their conviction. Finally, as the action has heated up, it’s drawn players from both of their respective camps into the fray. This week, we’ll look at the gold market and one of the problems with the Commitment of Traders report’s data.
Gold bugs always amaze me. Perhaps I’m sensitive to their discovery having grown up finding Goldbug on every page of Richard Scarry’s, Cars and Trucks and Things that Go. All I know they’ll come up with any reason to justify why, “This time it’s different.” I’ve plotted the collective actions of the large speculators on the included chart as well as the actions of the commercial traders. Take a look and tell me which group you’d like to follow.
Our trading philosophy is based on short to medium term swing trading. It’s rare that we hold a position for more than a week or, two. Our thesis has always been to side with the commercial traders when recent price action disagrees. In other words, commercial traders have sold the heck out of the recent silver rally. This means that the commercial miners expect prices to fall even though the market in general has rallied substantially. This is the type of tension we talk about all the time. While we’ll review the current situation in more detail, the macro outlook is what we’re after, today.
The precious metals markets have picked up steam fueled by negative interest rates and poor stock market performance. We’ve discussed the dislocations governmental policies can create within the markets extensively since the economic collapse and the new era of Economic Engineering at length in the past. Briefly, in a negative rate environment, investors feel more secure owning something that may be worth more in the future, like gold, than owning something with a guaranteed decay, Japanese bonds. This is not the place to argue storage and insurance versus the cost of the negative rate or, currency valuation versus the appreciation of goods owned. The economic theory is sound over the long run. However, we’re here to make money in the short-term and the long-term. Therefore, we see the recent rally in gold as being fueled by those late to the party. Frankly, anyone who bought gold above $1,100 per ounce may be in for some pain if they don’t lock in profits.
We’ve been bearish on on gold, platinum, copper and silver the entire fall. So far, so good. However, as we approach the lows for the year in these markets, it seems a prudent time to evaluate our positions, specifically, the silver futures market.