Category Archives: Metals

Three Charts Point to Crude Oil Support

The crude oil sell off has been vicious both in its depth and its speed. In fact, the market has been so negative that we last wrote about it this past June 11th. The market had provided a bit of a rally in the face a growing and overwhelmingly bearish commercial trader position which led to our headline, “Sell Crude at $65 Per Barrel.” Our primary focus is based on the Commodity Futures Trading Commission’s weekly Commitments  of Traders report. We use the actions of the commercial traders to help us determine value in the commodity markets like the buying opportunity in gold that we published in Futures Magazine on august 7th. Bringing this back to crude oil, here are three charts that show the crude oil market is nearing a bottom.

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Gold Decline Nearing Exhaustion

Much has been written recently regarding the record speculative short position in the gold futures market. Markets move in trends followed by periods of consolidation, sideways action and reversals. Most speculative trading is trend trading due to several factors outside the scope of this piece. Commercial traders on the other hand are swing traders. This is also referred to as value trading or, mean reversion trading. Their decisions are based on the perceived value they see between the commodities they need or produce and how current market prices impact the forward outlook of their businesses that use or, produce the commodity in question. The commercial traders in the gold market have just established their most bullish position since December of 2001.

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Weekly Commodity Strategy Review 10/10/2014

I’d like to begin this week’s recap with last week’s primary piece, Commitment of Traders Report Returns S&P 500 to 1900. Also note that we we alluded to this setup as early as last Tuesday in our piece for when we first discussed the shift in commercial trader bias while we were still sitting at 1975 in the December S&P 500 futures. Read more in, Commercial Selling Tips S&P 500 Bias.

Continue reading Weekly Commodity Strategy Review 10/10/2014

Trading the Platinum vs Gold Spread

Twenty years of trading has proven one thing correct, time and time again. The markets act in such a way as to do the greatest amount of harm to the greatest number of participants at any given moment. This is exactly how Sunday night’s trading began when, for a few minutes, traders were able to trade gold and platinum at the same prices. There were two opportunities on Sunday night. The first was shortly after the open and the second was around 2am Eastern time as you can see on the chart below.

Continue reading Trading the Platinum vs Gold Spread

Metals Markets Hit Oversold – Reversion Imminent

Our piece for TraderPlanet this morning focuses on the developing metals picture. Quantitative Easing in Europe has clearly contributed to the deflationary tone along with China’s unwillingness to fill the global demand gap. However, these macro issues carry little weight in our day to day trading.

This morning’s issue comes down to two things. First, the Commitment of Trader Report has shown tremendous commercial buying on this decline and secondly, platinum and gold hit parity. As I said in our piece for TraderPlanet, “Given the same price, would you rather own an ounce of platinum or, an ounce of gold?”

We’ll be following up on this in detail later in the week.

Read – Metals Markets Hit Oversold: Time to Revert to the Mean?

China Bolsters Copper Market

The United States is crawling into 2014 with the Federal Reserve Board doing everything it can to stave off deflation. Years of zero percent interest rate policies along with the current $85 billion per month in stimulus have failed to generate inflation in anything but the stock market. This leaves GDP well below 2% and unemployment remains stubbornly high. Meanwhile, the European Central Bank just cut their rates in half, now at a .25%, to spur any kind of economic growth of their own. Typically, two thirds of the world, North America and Europe mired in economic doldrums would lead to a generally soft commodity outlook. However, China’s growth continues to be the real story and this is best explained by the inner workings of the copper market.

China’s growth rate continues to exceed 7.5% and is expected to register a third consecutive quarter of growth, which may top 8% for Q4. The vast majority of this growth is in building. Industrial infrastructure and residential construction continue to boom. China’s arcane domestic investment laws are partly to blame for this as their residents have very few open channels of investment other than real estate. Further muddying the waters is their version of the loan qualification process, which now accepts hard assets, like copper as collateral. This has put China in the top spot in global copper consumption. In fact, they consume approximately 40% of the world’s copper shipments.

We often refer to copper as, “the economist of the metals market.” The logic follows the line of copper as a base need for economic expansion, which we view as building stuff – houses, electronics, buildings, cars, etc. It appears that the Chinese growth story is bigger than old world economic malaise. The copper market has seen renewed interest in commercial buying since Bernanke’s tapering talk in August signaled an, “everybody out of the pool,” moment.  In fact, cash copper prices are trading above the copper future’s price and copper miners are negotiating just how high they’re going to set their premiums for 2014.

The current spot premium is around $.05 – $.07 per pound which reflects the highest premium since the collapse of ’08. The surge in demand is prompting premium increases of 50% and higher as producers negotiate with Europe, Asia and America. Codelco, the world’s largest copper producer has announced planes to raise Chinese premiums by 41%. There are similar increases of 50% for the U.S. and up to 75% for the European Union. These price rises come in the face of an expected surplus of 200, 000 tons (less than 2% of total market) after experiencing a three-year supply deficit. In spite of the projected surplus, Codelco has openly admitted that they’ve hedged none of their forward production.

Commercial traders in the copper market were what tipped me off to the market’s increasingly bullish outlook. I was so busy looking at our domestic economy that I didn’t see the rebound in their buying after initial talk of tapering, which pointed to slowing growth and declining demand created the bearish scenario I outlined in Augusts’, “Copper Points to Slowing Economy.” Clearly, the cash market premiums are leading end line users to hedge their future needs through the purchase of forward copper futures contracts.

The largest net long position I can find for commercial traders in the copper market is near 40,000 contracts. This was made during the July sell-off. Previously, the largest net long commercial position I could find was in February of 2009 when copper was trading at $1.75 per pound and we were coming out of the major market crash.  What the market is seeing now is a greater willingness to own copper at much higher prices. This buying support is putting a floor in the market around the $3 per pound level and is prolonging the sideways market direction that has persisted throughout the year. The longer this occurs, the closer we are to breaching the downward sloping trend line that originated at the 2011 highs around $4.80 and now comes into play around $3.36 per pound. Obviously, a move above this would confirm the move for 2014.

We see two potential concerns in this 2014 scenario. First of all, China has always been an opaque marketplace where the economic statistics produced by the government must always be taken with a grain of salt. There is talk that end line demand is nowhere near as strong as Chinese imports suggest. However, for our purposes, it is pretty irrelevant if China is using their copper imports or, storing them. Either way, supplies are being taken off the market. Secondly, much of the mining that’s counted in moving us to surplus is in new mines whose production is only estimated. Therefore, their production numbers aren’t yet solidified. Finally, all things considered, copper may be one of the best physical assets to own as we approach 2014.

Copper Points to Slowing Economy

Copper is often referred to as, “the economist of the metals markets.” This is because of its use in all things that make the economy go round from electronics to commercial and residential construction and general infrastructure. When economic development is robust, copper prices follow suit. More importantly, because copper is a base ingredient in this mix, the price of copper typically precedes any moves in the general economy. Based on the current conditions of the copper market, we expect prices to fall and with it, overall economic activity in general.

The Federal Reserve Board announced its intentions to begin tapering off economic stimulus on June 19th. As a result, Interest rates have soared. Since the Fed’s announcement we’ve seen mortgage rates rise by nearly a full point from May’s low to multi-year highs. This is a 15% increase in two months. The effect on mortgage applications is already taking hold as we’ve seen a decline in mortgage applications of more than 7% in the last two months. This has led to a 13.4% decline in new home sales for the month of July, the biggest decline in three years. Rising interest rates are slowing the economic recovery that has been led by the housing market.

No copper scenario is complete without discussing China. China is the world’s largest copper consumer, taking around 40% of the annual mining total. Unfortunately, separating the governmentally supported information handouts from the man on the street’s first hand economic observations is a difficult task in a country where information is so heavily monitored and controlled. The major news events this week are twofold. First, a group of Chinese investors are stalling on a $3 billion copper mine investment in Afghanistan. Their reasons are many but the five-year delay they just inserted into the talks suggests that the investors aren’t comfortable with current, physical demand levels. Secondly, Chinese manufacturing data, though signaling signs of expansion last month, appears to have done so through inventory reduction more so than actual production. This was seen in the contraction of new export orders, stocks of finished goods and employment.

Funneling the macro data into something tradable leads us to further bearish scenarios.  Commercial traders were actively listening to Bernanke’s discussion signaling the end of the monthly injections of $85 billion into our economy. Commercial copper traders clearly see this as a negative as they’ve been net sellers in five of the six weeks since the announcement. Perhaps more importantly, this comes after they had accumulated a very large position around the $3 per pound level we’re currently trading at. This suggests that they were locking in future deliveries based on continued economic expansion prior to the Fed’s announcement. Their actions since clearly state their change of attitude going forward and perhaps most importantly from a trading standpoint provides the potential serious selling if they decide there is no longer a reason to own copper at $3 per pound.

Finally, moving to the technical side of the market it appears that copper’s strength over the last three weeks may have more to do with speculative short covering rather than the creation of new long positions. Copper volume reached its highest level since December of 2009 on June 28th. This coincided with the lowest prices seen since October of 2011. Expanding volume coupled with declining prices is indicative of a strengthening downward trend. This becomes even more obvious in light of the rapid decline in volume and open interest over the last three weeks as the market bounced off its lows.

We feel that the slowdown in domestic construction that has been brought about by the Fed’s actions coupled with a large and now, unnecessary commercial long position will force the copper futures market to follow its typical seasonal path and decline through the end of October. This should certainly lead to a test of the psychologically important $3 per pound level. Violating the $3 per pound level leaves only the 2010 low of $2.90 as support before bringing into question the economic crisis low of 2009 near $1.50. Remember that commodities are not corporations. The world can live without another corporation but copper’s base necessity will serve to put a floor under the market. Therefore, a violation of $3 and even $2.90 is possible however, the market will find waiting buyers at bargain prices.

Measuring the Metal Markets

The recent selloff in the metal markets has broken the sideways trading range they’ve been in for more than a year. We’ll begin by briefly recapping their recent history back to the 2011 high water marks. Copper was the first market to peak. An expanding Chinese economy and a low interest rate environment drove this market.  This led to large end line consumers purchasing forward contracts to meet future demand. Finally, copper peaked at $4.65 per pound in February of 2011. The silver market peaked in April of 2011 at nearly $50 per ounce. This was by far the most speculative of the metals markets and we’ll get into the ramifications of a speculative rally, shortly. Platinum made its high in August of 2011 at $1,918 per ounce. Gold was the slowest to peak finally reaching $1,923 per ounce in September of 2011.

The recent declines have come amid a backdrop of rising interest rates. The language coming from the Federal Reserve Board suggests that they are looking to tighten money supply and withdraw some of the excess cash that has been pumped into the system beginning in September 2001.

The recent lows mark very important Fibonacci points. The Fibonacci sequence originated in 13th century Italy by Leonardo Pisano, nicknamed Fibonacci. The mathematician found the pattern of 0+1 = 1, 1+1 = 2, 2+1 = 3, 5+3 = 8, 8+5 = 13, etc. This pattern is found throughout nature to include flower seeds, shells, pineapple segments, etc. Their adaptation to trading financial markets came through the use of wave analysis and the energy released in the action and reaction of those waves.

The trading adaptation converts the Fibonacci sequence into ratios. The ratios are then used in conjunction with peak and trough analysis to determine not only potential support and resistance levels but also, the energy required to turn the tide and begin a new sequence in the opposite direction. The two primary Fibonacci ratios used in trading are .38 and .62. These are rounded for the sake of simplicity. A trip to the beach will explain their importance in that wave one and wave two typically encroach upon the beach by a third of normal shoreline measurement while the third wave may advance nearly twice as far prior to its retreat.

Putting these ratios to use in the metal markets we can see that gold, platinum and copper have all retreated by approximately 38% from their all time highs made in 2011. Platinum has retreated by a third, copper by 36% and gold by 39%. Silver, as the outlier has retreated by 63%, almost stopping exactly at the .62 ratio. The depth of silver’s decline also helps it hold its crown as the most speculative and volatile of the metals.

The Fibonacci numbers don’t possess enough voodoo to generate trading action on their own. However, when combined with the considerable commercial buying we’ve seen on this decline these retracements must be viewed in the context of a pullback within a longer term upwards trend. Beginning with the recent biggest loser we see that commercial traders have been net buyers in the silver market for 19 of the last 23 weeks, nearly tripling their net long position within that time. Gold, copper and platinum are also getting strong support by the commercial traders on this decline. Their actions tell us two things. First, they don’t expect the end of cheap money to be the end of strength in the metals markets. Secondly, this decline is a buying opportunity.

Specifically, we view platinum as the most attractive buying opportunity. This is based on its industrial use as well as the escalating mining cost of platinum going forward. Currently, platinum is trading below its cost of forward production. The mining cost is about $1,500 per ounce while the futures market is trading around $1,350. Furthermore, platinum is the primary component in catalytic converters of diesel engines. Diesel engines continue to take market share in Europe, India and China. This leads us to believe that in the wake of the metal markets’ declines; platinum is most likely the safest one to buy.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Commercial Traders Cap Copper

Copper is frequently referred to as the economist of the metal markets. This is because copper is used in nearly everything that’s made. If it’s not in the final product, it’s certainly in the production facilities and the machines used to make it. Therefore, one assumes that the more copper a business or country buys, the more production they see in their near future. This is part of the reason copper has such a high correlation with rising stock markets. In fact, the correlation relationship between the copper market and the S&P 500 hasn’t been negative since the financial meltdown in early 2009.

The copper market made an all time high in January of 2011 at $4.7735 per pound. Since then, the market has consolidated primarily between $3.25 and $4 per pound. The consolidation continues to tighten and can be easily seen on a weekly chart as the trend lines that define the highs and lows continue to converge. The news will tell you that the reason the market is in limbo is due to the fiscal cliff negotiations and that once a deal is struck, the market will see enough of the estimated $2.5 trillion pent up dollars in the domestic corporate coffers to push it back beyond its highs.

I would suggest an alternative scenario in that the copper market has been fueled by growth overseas in developing markets and that it may have run its course for the near term. The top performing stock market for 2012 is Turkey. Their market is up nearly 50% for the year. Much of their success has been due to their ability to create a stable and labor friendly manufacturing center. Rounding out the top ten for the year are – Pakistan, Philippines, Thailand, Estonia, Nigeria, Kenya, Denmark, Germany and India, respectively. Germany is the only G7 country on the list and India is the only one of the BRIC’s to make the list. Clearly, this has been a good year for developing countries.

Digging deeper into the numbers behind the copper market we find some signs that the market price may not be supported by the development of the aforementioned economies. In fact, the deeper we dig, the more it looks like the market is being propped up by inflation expectations and speculative purchases. The main issues are the Chinese and U.S. economies since they are the number one and two copper consumers in the world, respectively.

Commercial traders have sold more than 12,000 contracts, about 25% of their position, over the last month and now hold the smallest net long position since late April. This selling has been enough to turn commercial traders’ momentum negative and set up a sell signal as the last bit of this rally has been driven by speculators and index funds.

This type of behavior is typical of a market that is moving sideways. Speculative participants tend to be buyers at the highs and sellers at the lows for two primary reasons. First of all, they’re afraid to miss the next big move. Secondly, they can’t match the commercial traders’ staying power and end up forced out of the market every time the market looks like it’s about to fall. This is exactly why we use the commercial traders to signal which side of the market we should be on and then use the speculators to create a bounce to sell or a dip to buy within the context of our overall outlook.

That being said, we will be looking for opportunities to sell March copper futures on any speculative rallies that stop short of the downward sloping trend line from the January 2011 highs, which now comes in at $3.7330 on the weekly chart. We’ll maintain this stance as long as commercial traders continue their selling pressure as we believe that is what will ultimately force the speculators to abandon their long positions.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.