Much of successful trading, like economics, comes from making small changes that over time, affect the big picture. Today, we’ll discuss a marginal improvement to our Commitments of Traders swing trading calculations that improved performance across all of the markets we trade and that leads to big changes in the bottom line over time.
There’s a thing about records. They continue until, they don’t. A string of record weather continues until it changes. Similarly, markets can be continually propelled until they aren’t. Such is the case with the current silver market. Speculators in the silver futures market have set net long and total position records in each of the last three weeks. This has led to a significantly overbought market that is due for a correction. Once a catalyst is provided, whether it be an FOMC announcement or some other data point, the speculative washout should be substantial.
This year began with a bang. Our forecasting models accurately predicted many of 2016’s early commodity rallies in metals, energies and grains. Our models also expressed the notion that while these rallies would be sharp, there was little evidence to suggest that this was anything more than a temporary spike in a deflating global economy. Therefore, the persistence of these rallies has been the biggest surprise of the year. However, the same factors that have led us to believe that these rallies would be temporary have only increased their alarm. This week, we’ll examine the primary component of our deflationary argument while also shedding some light on an inspired tweak to an existing measure of global economic activity.
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.
Many markets have created key points due the increased volatility over the last few weeks. While some of these appear to be opportunities to sell into existing downward trends like the Yen or silver market, we’ll focus on the possible new shoots of a sustainable move in the copper market. We’ll examine the actions of the large and small speculators along with the commercial traders to determine where we are in the current cycle as well as how these cycles typically play out, using the last several years worth of Commitment of Traders data in the copper futures market.
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 writing about the metal markets quite a bit, having recently published articles at Futures Magazine, Equities.com and TraderPlanet. We’ve seen major churning by the commercial traders which is indicative of a broader change in sentiment. Obviously, when it comes to the metals markets like gold, silver, platinum and copper, the major questions on everyone’s mind is, “Have we bottomed?” We’ll review the current setups in these markets and attempt to answer just that question.
The most heavily anticipated Federal Reserve meeting in the last seven years turned out to be a non-event. No change. The ticker flashed across the bottom of the screen, “The Federal Reserve Board has left interest rates at 0. No change.” There are lots of variables factored into their decision but the end result is that they simply didn’t feel our economy was ready strong enough to withstand even the slightest of interest rate increases. Assuming they’re right, what do we make of copper’s recent rally? Clearly an expanding economy will need more copper. Apparently, the commercial traders weren’t too keen on this idea as they’ve been net sellers in each of the last four weeks. Furthermore, the Commitment of Traders report reveals a unique imbalance that bodes poorly for copper’s future prices.