From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Procyclical commodities have attracted all the attention this year as inflation and rising rates have driven prices considerably higher.
But, as we pointed out last week, many of these contracts -- Brent crude, natural gas, copper -- are running into areas of overhead supply or are already in the process of correcting.
With that as our backdrop, let’s switch gears and focus on an area of the commodity space we haven’t talked about in months.
That’s right... precious metals!
While we’re seeing many leading commodities pause at logical levels of resistance, gold and silver have finally stopped going down and are rebounding off support. Despite trending lower since last summer, they're still holding above the lower bounds of their trading ranges. We think this basket of shiny rocks is ripe for review.
Let’s take a look around the precious metals complex and see what’s new.
First, we have a chart of gold futures:
After a strong rally to new all-time highs in August 2020, gold futures have been correcting through both time and price for about 16 months now.
This kind of action has been the story for precious metals in recent years -- explosive breakouts followed by extensive corrections.
What really stands out on the daily chart is that gold has repeatedly found support around 1,670. It also made a higher low last month, a critical first step in any trend reversal.
It would make sense for gold to carve out a base at this former resistance level near its 2012 highs. But before we turn too bullish, we want to see gold reclaim its year-to-date highs, which coincides with the old record highs from 2011.
Given that our risk level is so well-defined at the former highs, we want to be buyers on strength above 1,920 with an initial objective at the former all-time highs around 2,100.
We have no business owning gold below 1,920, as risk is not in our favor.
Next, let’s take a look at gold’s crazy cousin -- silver:
Similar to gold, silver ripped higher into the summer of 2020, ran into resistance, and has been a hot mess ever since.
Also, like the rest of the precious metals, it’s finding support at the lower bounds of its recent range.
The key level in silver is its recent highs around 25. Risk is well-defined at that level, which could define for us an early entry to a potential upside resolution from this range.
If and when silver breaks out of this holding pattern above 30, the bias is undoubtedly higher from a structural standpoint as well. We could see 42 within a few short months.
Until then, we can be buyers on a decisive close above 25 with a tactical target at overhead supply around 30. If you don’t want to deal with the excess risk of trading a range-bound pattern, it’s best to wait and only be long above 30 with a target of 42.
Next, we have platinum futures:
After violating the pre-COVID highs and the lower bounds of its recent range this summer, platinum is currently fighting to reclaim this level.
We can either buy a break back above those former 2020 highs around 1,025 or wait for more confirmation on a close above the recent pivot high of 1,080. Either way, we’re targeting the year-to-date highs around 1,300.
If we’re below 1,025 we simply can’t be long platinum as risk is to the downside.
Finally, we have palladium futures:
From a technical perspective, it’s debatable whether palladium is even a precious metal. The supply-and-demand forces in this market move at their own rhythm. But if you ask any goldsmith, they’ll tell you without hesitation that it’s a precious metal. It makes no difference to us.
Similar to the rest of the space, palladium recently pulled back and tested a critical level of former support.
Although it’s still holding its range, the risk/reward for a tactical long is not very favorable at current prices.
For now, palladium warrants patience. While this is true for the entire precious metals space over the long run, the risk/reward in gold, silver, and platinum is favorable for tactical longs at these levels.
It remains our view that we’re in a new commodities supercycle, so some rotation away from the leaders and into the laggards would certainly fit that theme. We want to be ready for it.
That’s it for our review of the precious metals space.
We hope you enjoyed it!
COT Heatmap Highlights
- Minneapolis Wheat: Commercial hedgers continue to add to their shorts. They are the most net short in history for the third week in a row.
- KC Wheat: Commercials added over 5,500 contracts to their short positions this week, inching closer to their three-year extreme.
- Sugar: Commercial hedgers continued to reduce their short exposure after unwinding almost 56,000 contracts in recent weeks.
- Coffee: Commercial short positioning was relatively unchanged last week and remains less than 4% away from the three-year extreme.
As always, let us know what you think. We love hearing from you.
Thanks for reading, and be sure to download our Commodity Report below!
