The above introductory comments are edited excerpts from an article* by Tiho Brkan (ShortSideOfLong.com) entitled Have Metals Finally Bottomed?.
The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Brkan goes on to say in further edited excerpts:
We have seen ongoing negativity towards the metals sector in the media as of late, whether its:
- missing copper used as collateral funding,
- fraudulent activities with gold imports,
- oversupply of inventory at the LME warehouses,
- slowing Chinese commodity imports
- and so forth
yet it seems that the metals & mining sector is refusing to make new lows, even as bad news circles around like a bad smell…
Rogers Metals Index
[In the chart below you will] notice that the Rogers Metals Index (NYSE Symbol: RJZ) has:
- been basing since June 2013,
- failed to make new lows for a year now,
- started to rally and is now challenging the downtrend line
- and, in coming weeks, it might even possibly attempt a break out.
The reason I like using the Rogers Metal Index as a barometer of metal prices is because its weighting is by far the most balanced…[consisting of:
- Copper (19%),
- Aluminium (19%),
- Gold (14.2%),
- Silver (9.5%),
- Lead (9.5%),
- Zinc (9.5%),
- Platinum (8.5%)
- Other metals (10.8%)
To get a better understanding of the overall sector, let us look at the breadth of the index and what some of the individual metal prices are currently doing.
Firstly, we have some positive developments with Copper. After a prolonged bear market, which has been in place since February 2011, the price of Copper has finally staged a breakout this week [see chart below]. It remains to be seen how constructive this bullish movement will be, but one thing is worth noting for sure: hedge funds and other speculators have been heavily shorting this metal throughout 2013 and 2014. If the metal now bottoms and stages a decent rally, hedge funds will once again prove their value in being “dumb money”.
Next, focusing our attention on Aluminium [Aluminum] in the chart below, we can see just how severe and painful the bear market has been. From its peak in 2011, the metal was down at much as 50%, if not more. Apply the contango to the total return of the metal and the recent lows seen in February of 2014 are actually even lower then the bottoming trough in March 2009. This is truly one depressed asset and it won’t take much to create an upside surprise!
Technically speaking, we have some positive developments as of late. The price has finally broken above its downtrend line, which has been in place of years. Moreover, the metal is now also trading above the 200 day moving average. Momentum is finally turning positive and a break above $20 in the ETF could signal an uptrend. Remember that both Copper and Aluminium make up almost 40% of the index, so keep your eye on both of these metals.
Source: Stock Charts (edited by Short Side of Long)
…Silver is without a doubt the most oversold major asset over the last 3 years (even beating Aluminium). It has tanked by more then 60% from its May 2011 peak near $50 per ounce. Even though this article might prove to be wrong and the metal might not yet be at a final low, nevertheless it still offers tremendous value even now (in both nominal and relative terms).
Interestingly, just like Copper, [as seen in the chart below] it has also recently staged a breakout from its 3 year downtrend line. This is a bullish development so far, as long as the rally doesn’t fizzle out once again, the way it has during previous attempts. In similar fashion to other components within the index, Silver’s lowest low was registered in June 2013 – exactly one year ago.
Despite the unfavourable conditions where we are constantly reminded that the QE program is ending via Fed’s taper, the price has refused to make lower lows and so far seems to be building a basing pattern. A break above $22 at first, followed by $25 later, would signal that the uptrend has once again returned. If accomplished in coming months and quarters, by definition the precious metal would be making higher highs and higher lows.
4. Other Metals
…Other metals within the index are also staging favourable price action developments.
- Platinum has been basing for awhile now and is attempting a breakout
- Nickel has already posted tremendous upside move this year despite constant negativity towards it
- Palladium is currently in progress of hitting 52 week new highs as it moves above the 2011 level.
5. Mining Sector
[In addition to the various metals mentioned above,] the mining sector is once again showing signs of life. In the chart below, I have constructed a grid of Copper miners (upper left), Coal miners (lower left), global junior mining companies (upper right) and global gold mining companies (lower right). All of these sectors (and many others such as Steel) are either breaking out from their prolonged downtrends or are attempting to do so right now…
The final point I would like to make is that it seems majority of these inflationary metal assets and global mining companies bottomed out in December 2013, just as Christine Lagarde was warning the world’s leaders and policy about deflation. How ironic… maybe it is inflation that they should be worried about!
I have to admit, this is a very hard call to make and I could easily be wrong…but I am courageously sticking my neck out here and stating that we have most likely seen the lows for the broad metals & mining sector.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://shortsideoflong.com/2014/07/metals-moving/ (Click here to subscribe to Short Side of Long bi-monthly newsletter, an in-depth commentary of global financial assets and fundamental conditions. The newsletter is designed for an individual investor who requires more information than the weekly blog posts. Investment focus leans towards contrarian investing and opportunities of a depressed nature.)
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