From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Not unlike the major US equity indexes, the commodity space is still range-bound as we head into year-end.
When we compare the trailing 12-month returns of individual groups, we get a sense of how bifurcated the commodity market has been. Another thing that stands out is just how weak precious metals have been relative to their peers.
While the rest of the asset class has posted solid gains on the year, gold and silver continue to trend lower. If this is truly a commodities supercycle, we’d expect to see some participation from this group. And, considering they’ve been in a downtrend for almost 18-months now as the rest of the space has been working, we’d expect it to happen soon.
Let’s take a closer look at what’s going on with these shiny rocks.
First, here’s a chart with the trailing 12-month returns of our four major commodity indexes - energy, precious metals, base metals, and ags:
Notice what’s different about PMs? It's the only area within the commodity space to post negative returns this year. It's not even in the same ballpark as the other groups.
There’s no question that gold kicked off the commodities bull market last year, hitting new all-time highs almost 12 months before Dr. Copper. But it’s been more than a year since gold peaked. At some point, we have to imagine these metals dig in and begin to participate alongside the rest of the space.
However, when we look at the charts, there are no signs of the selling pressure easing for precious metals yet. If anything, they look vulnerable to another leg lower.
Our equal-weight precious metals index illustrates this point well:
When we equal-weight gold, silver, and platinum futures and create an index, we see that precious metals as a group have been carving out a distribution formation since the summer of 2020.
We’re sitting right on the breakdown level of this potential topping pattern now. What happens next is crucial.
The index looks almost identical to a chart of silver futures, so we can look here for a heads up:
Like the index, silver continues to test the lower bounds of its 16-month range. If silver futures violate 21.50, that’s not a good sign for precious metals in general.
We can get short on a decisive close below 21.50 with a downside target around 19. If silver starts to drop, we imagine our target will be hit in a short amount of time due to the absence of price memory between current support and former resistance.
But in the event silver digs in and defends these former lows, we can’t be short, as we’re likely to see a mean-reversion move higher. We can only be short on weakness below the September lows of 21.50.
Let’s take a look at the rest of the space now. Silver isn’t the only rock showing signs of weakness.
Here’s platinum:
It turns out testing former support levels and year-to-date lows is a common theme among precious metals, as platinum briefly undercut its September lows around 895 and hit its lowest level of the year.
It quickly recovered this week, but it still remains just above those former lows from the fall. It’s clear that these are charts that look ready to resolve lower, not higher.
We’re even seeing weakness in that precious metal that isn’t quite a precious metal, palladium. Of course, if we ask any jeweler, they’ll tell us without hesitation that it should fall into this group. But palladium’s industrial applications are no secret these days.
While there's merit to both arguments, all that matters to us is that it’s acting like a precious metal right now.
For that reason, we want to keep an eye on palladium as it tests a key extension level and area of former resistance turned support.
Like silver, we can sell weakness here. A break below 1,560 offers a favorable short opportunity with a target of 1,150.
Last but certainly not least, we have a chart of gold futures overlaid with the silver/gold ratio:
Of all the PMs, gold looks the best. It’s well above its year-to-date lows and has actually made a series of higher lows since August. If there were a bright spot within the space, it’s definitely gold!
With that said, the weight of the evidence still points lower for precious metals. One data point that indicates we could be in for further weakness is the new lows in the silver/gold ratio.
Precious metals bulls want to see silver find support and start working higher relative to gold. This would signal risk appetite re-entering the space and would bode well for the group at large.
For now, this is simply not happening, as silver continues to underperform.
Precious metals have been beaten down for more than a year. As a group, they're showing little signs of picking themselves up just yet.
At the same time, if there were ever a point for these shiny rocks to start participating, it's now!
If precious metals are going to get going, our shorts are not going to work and the breakdowns we’re discussing are likely to fail and resolve in the opposite direction. Regardless of what happens, there will be valuable information on how prices react at these key levels.
We have to imagine that if we’re truly in a commodity supercycle that even the weakest groups within the space are going to catch higher eventually. To see precious metals continue to print negative returns is concerning.
Stay tuned! We'll continue to keep you posted on any critical developments within the precious metals space.
COT Heatmap Highlights
Australian Dollar: Commercials' long positioning is still near historical extremes.
Coffee: Commercial hedgers remain net short, bordering on a three-year record, but have slightly lightened their short exposure.
Palladium: Commercials are the most net long in history.
US Dollar Index: Commercial hedgers dropped their net short position by more than 3,000 contracts last week.
