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 track the Commitment of Traders report in four major domestic metals markets – gold, silver, platinum and copper. Currently, the commercial trader category is roughly bullish on the lot of them. Very rarely do we see all four metals markets telling us the same thing. While the markets may seem similar, their uses in both industry and investing provides each of the four with subtle nuances and slightly negative correlations that keep them from syncing up very often. Currently, the commercial long hedgers, the ones who take metal off the market for use in finished products or locked up in investments feel that the platinum market is a nearing bargain levels as it hasn’t traded this low since 2009.
This has been a tremendously active week with big volatility and important market turns. We have to begin with last week’s gold platinum spread. We outlined the case in our Gold, Silver, Platinum and Copper Outlook. This week, April platinum traded down to nearly a $50 per ounce discount to April gold. Currently, this spread has rebounded to approximately a $5 discount. That’s as much as $4,500 profit depending on the entry point.
Unfortunately, we were unable to publish Monday due to the death of my main Mac. It looks like we’ll be evaluating our tech shortly as I’m already frustrated from working on this laptop all week.
Anyway, we were able to publish a Gold Sell Signal at $1,300 on Tuesday for Equities.com. This was a follow up to our, Gold, Silver, Platinum and Copper Outlook from last week. There are two points to be made here. First, the discretionary COT Signals nailed the turn downward in the metals markets. Secondly, the gold-platinum spread has COLLAPSED. We watched platinum fall to a $50 per ounce discount to gold during yesterday’s trade. We still believe that fundamentally, an ounce of platinum is worth more than an ounce of gold.
The main focus of our research this week has been the soybean market. There has been a measurable shift in commercial soybean trader behavior over the last several years as Brazilian soybean production has exploded. We explain what it looks like now, ahead of the Brazilian harvest in our Pre-Planting Soybean Outlook.
Coincidentally, David Hightower just published a special report on the soybean market. We’ve posted his analysis to our site, here. Their take suggests that the late winter, early spring rally our analysis focuses on may be missing the bigger picture; the summer post-planting sell off.
We’ve been noting the declining internals of the gold market which have suggested that this rally may not be sustainable. Last week, we looked at the 2015 metal markets in general and noted some of the details that have fueled gold’s recent rally, including sovereign currency destruction, deflation and Russian credit being relegated to junk status. These headline grabbing issues have brought small speculators back into the gold market based on gold’s relative value as it was trading nearer to $1,200 per ounce just earlier this month, and currency destruction rhetoric.
Unfortunately for the small speculators and those late to the game, it appears that this rally is about over. Commercial short hedgers have been very price sensitive over the last year. Three times the market has attempted to hold above $1,300 and all three times it was turned lower by heavy commercial selling. Looking at the chart below it is easy to see that their behavior is not only similar at this point to the past rally attempts but even more aggressively negative than the previous two attempts at these price levels.
Last week’s Gold, Platinum, Silver and Copper Outlook for 2015 explained a bit deeper, “Commercial traders have sold more than 25,000 contracts since the beginning of the year while open interest has declined by nearly 37,000 contracts. Healthy rallies see growing open interest. This decline is most distinct in the gold market and that’s why we feel gold futures will fall faster than platinum futures and bring the price of platinum back above the price of gold.”
Commercial traders are clearly offloading the inventory they picked nearly 10% lower and pocketing the cash accrued to their futures accounts. This morning’s small flight to safety as fearful traders come in and buy gold due to the stock market’s sell-off should be viewed as a selling opportunity in gold futures. It has become quite clear that $1,300 is the mean value area in the gold market where commercial traders will continue to be sellers above this price and buyers at steep discounts.
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.
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.
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.