Now that the consumer price index and producer price index reports are behind us, and the markets have accepted tapering -- but still hot inflation -- we could see some profit-taking in commodities like gold, silver, and copper.
Similarly, the trend in the U.S. dollar is decisively lower, and we believe that will continue to be the case in the bigger picture. But if we narrow the time frame to weeks rather than months, we suspect the dollar bears will soon be put to the test. There is no such thing as easy money in the financial markets, but if there were, it could be said that the "easy" money in the short dollar and long metals trades would have already been made. Things will likely get rocky from here.
Euro Late and a Dollar Short
It wasn't that long ago that the world, starved of dollars, dumped euro holdings without regard to price. We've now seen some of the excessive currency trade unwind itself. As a result, the euro is approaching its previous trading range, which probably would have endured had a war not broken out on European soil. In other words, this seems like a proper place for investors to pause and reassess.
The metals markets were held back in 2022 by the soaring dollar, but with the currency markets normalizing, the metals have recovered nicely; some might say too well. According to our charts, the rally in gold and copper is currently out-of-bounds, while the silver market is lagging. Some consider silver a bellwether metal, because it has both industrial and precious qualities. Thus, silver languishing below resistance might be regarded as a red flag to the metals rally.
For reference, the gold, copper, and silver markets have been settling in the opposite direction of the US dollar index futures contract between 75% and 85% of trading sessions over the previous 180 trading days. Naturally, these metals have settled in the same direction as the euro the majority of the time. Accordingly, we can expect any corrections in the currency arena to impact the metals markets profoundly and vice- versa -- if you are the type who likes to analyze which is the dog and which is the tail. In any case, investors and traders should be mindful of the correlations to avoid taking on too much risk.
Copper futures have successfully broken out, but we would be surprised to see the rally sustain itself in the coming weeks. The RSI (Relative Strength Index) is hovering above 70.00, which suggests the rally is overextended and has generally proven unsustainable in commodity markets.
A break below $4.10 would put prices back into the natural trading range with a reasonable downside target of $3.80. Although we aren't expecting a retest of the next trendline near $3.40, it could happen if the fundamental backdrop falls apart (weak economic data or an unforeseen market shock).
Like copper, gold futures have broken trendline resistance; breakout traders are likely salivating at the upside prospects. However, anyone who has traded gold for any time knows that precious metals rallies are always full of surprises and momentum chasers are prone to get caught on the wrong foot.
If you are a gold bull, it is probably a good idea to patiently wait for lower prices to deploy risk capital. For those who fear missing out, perhaps micro futures contracts at 10 ounces per contract are the way to go. They allow market participants to dip a toe in without risking a body part.
Silver: The Path of Resistance
I'll never forget the silver bull market of 2011. The market rallied uncontrollably, and in my opinion, without merit, from $19 to $50. I am a natural-born contrarian, so the move didn't sit right with me.
Still, luckily, I didn't have any clients caught on the wrong side of it, either, so monitoring the price action was more of an academic exercise than anything.
Analysts were adamant that the metal was undervalued even at the height of the silver mania. At the time, there were non-stop TV and internet ads touting the bullish silver story. My uncle (a man who had never mentioned financial or commodity markets to me up to that point) called asking about how he could put his money into silver for safety against an economic collapse, the market reversed, and I knew the jig was up. Over a decade later, we've yet to retest those heights; we might never see $50 silver again, but I think there is a possibility of $30 or slightly higher silver at some point this year.
Nevertheless, the most likely move from here is lower. Silver has lagged behind gold and copper, and I believe it could be trying to tell us something. The weekly chart suggests a significant pivot line that comes in near 24.20; unless we can get a weekly close above this price, the path of least resistance is lower, with $21.00 as a likely bearish target.
The year is young, tax season is almost upon us, and nearly all asset classes are approaching significant technical levels. We should expect to see some profit-taking; corrections are healthy and give those left behind a chance to get in at reasonable prices.