Take the Pedal Off the Metals?

Precious and industrial metals have proven the naysayers wrong. Just a few short weeks ago, conventional wisdom called for a continuation in the Treasury route bringing gold, silver, and even copper along for the ride. Yet that appears to have been the peak of pessimism in this space. Nevertheless, all three of the aforementioned metals have reached critical pivot areas that could trigger a large breakout or corrective action. While we lean higher in gold and silver in the long run, the short-run prospects feel troublesome. If you have made some money on the long side of gold, it might be time to shift toward playing defense rather than offense. Gold The daily gold chart tells two stories. Price swings dating back to the August 2020 highs have formed two separate downtrend ranges. The internal range suggests $1,800 resistance could discourage additional buying, but the larger trading channel suggests we won't reach momentum exhaustion until prices get closer to $1,850. Anybody that has traded gold knows that $50 per ounce falls into the noise category. It is a mere 2.7% move in a metal that can move 20% to 40% in short order. In other words, those that have managed to make money on the way up shouldn't complacently wait for the opportunity to take profits near $1,850. Instead, the focus should be on protecting gains, locking in some profit, or both. If there are expectations of a significant breakout, it might make sense to keep a small position (preferably hedged) but being aggressively bullish into resistance levels is a recipe for disaster. Source: QST Silver Unlike gold, the value of silver is derived from industrial use in addition to investors' perceptions of market risk, inflation, and even political risk. Accordingly, it seems likely that silver could be better supported than gold given the reopening of the global economy in the aftermath of the epidemic. Still, failure to see follow-through buying after Wednesday's run is disappointing. Further, $26.75 has been a significant pivot price. It has acted as sharp resistance to rallies and solid support on the occasions silver traded above it. Not coincidentally, the high Wednesday in May silver futures was $26.73. The silver bulls should also be concerned with the upcoming May option and futures contract expiration. In the recent past, we have seen silver suffer large blows on expiration week (which happens to be next week). In summary, failure to break through resistance and with even risk looming, the odds are pointing toward corrective action in silver. On the other hand, if the bulls miraculously recover to push prices above $26.75 there is potential for an explosive rally that could eventually see the low $30.00s. For now, we prefer proceeding with the expectations of a pullback which could approach $24.00 per ounce again. Thus, the bulls should be protecting profits not holding an aggressive position hoping for a breakout. Source: QST Copper The copper market doesn't necessarily benefit from the same fear concerns the precious metals do but it certainly does benefit from weakness in the U.S. dollar. It might be hard to believe, but gold and silver have not maintained the sharp negative correlation with the U.S. dollar most assume are perpetual. Throughout the last 180 trading days, gold futures traded on the CME Group carried a positive correlation with the U.S. dollar index futures contract of 35%. This means they have moved, on average, in the same direction roughly 35 out of 100 closes. Silver, on the other hand, carried a negative correlation of just 25% in the same time frame. Source: QST The copper market is also not as tied to the dollar as it once was, but it is still maintaining a negative correlation of about 60%. Accordingly, a stronger dollar, if it occurs as we expect, will pay a toll on the copper rally. We see $4.30 as the critical pivot price in copper. A break and close above this price could trigger a quick probe to $4.50 and maybe even $4.70, near the all-time-high, but these levels are unlikely to hold. More likely, would be a reversal in the short run followed by a retest of $4.10 to $4.00. If copper trades below $4.00 again, the liquidation could be substantial; the next support level would be near $3.50. Source: QST Conclusion The bullish trend in metals has been impressive but it might be time to reassess positions to ensure the risks aren't outsized relative to the prospects of a breakout or the consequences of a rejection of the rally. If the dollar holds support, which is the most likely outcome in our estimation, it will be difficult for silver, copper, and perhaps even gold, to continue their climb.

Take the Pedal Off the Metals?

A deep dive into gold, silver and copper.

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