Metals are something of a leading indicator for the economy. There are very few products that do not in one way or another depend on a metal in their production. (Cement comes to mind, but in use it is often combined with iron rebar; oil is refined using metal catalysts; plastics are made with metal catalysts, wood is cut with metal tools and shipped via metal vehicles).
For you to get a new iPod in a cardboard box, someone had to make the cardboard (and the saws that cut the trees) and refine the oil for the plastics (using catalysts) and ship it (using oil products in the fuels and metals in the vehicles). Then there are the metals IN the product. Nickle or Lithium in the batteries of different products (or lead in car batteries). Loads of copper wiring. Tin in the solder. The list goes on. Long before that iPod or new car reaches your hands, metals were mined and refined to make it possible. When an economic boom is starting, metals rise early. When the economy stalls, among the first things manufacturers do is cancel orders for raw materials and tooling. Metals take a dive.
When Daddy Warbucks (in Little Orphan Annie) sees a recovery coming, what does he shout into the phone? ~”Copper, Copper! Buy more COPPER!”
Well, the flip side is true, too. In a downturn, you don’t want metals. Recently, China announced lower production numbers. When China, who never says anything bad about China, says things are slow; well, they ARE slow. And metals promptly tanked.
So now the “bottom watch” begins. Is THIS the bottom? Or is it still to come?
My method depends on having prices cross over the Simple Moving Average, return to it from above, and fail to punch back through. That confirms the bottom. Until then, it is just another “counter trend rally” if prices rise. They usually rise to the SMA lines, and fall away again. But things are not always and forever. Eventually prices will ‘punch through’ and the trend reverses.
The typical pattern is a plunge, return to the SMA stack from below, a further plunge or two to a bottom. Then a rise through the SMA stack (the “Dead Cat Bounce”) and a return to the SMA stack from above with a failure to penetrate to the downside. Often there is a “ring down” where prices wobble back and forth with a generally flat trend as the bulls and bears fight it out and the range narrows. At the tip of that wedging-in process, one side wins. THAT is when you can place longer term bets, until then it’s just swing trading.
OK, with that preamble, what are metals saying now?
Lets start with Silver vs stocks and bonds.
SLV is silver, RUT is the Russel 2000 broad stock index, and TLT is the long duration bond fund. GLD is gold.
Why start with Silver? Because it has been hyped a lot on the TV lately. My most basic silver and gold indicator is a contrarian indicator. When the TV ads are strongly pushing Gold and Silver, it typically means the metals sellers are having trouble getting enough customers. Pretty much everyone has already bought and it’s time to rope in the least savvy from the home market.
Also, Silver is an interesting metal in that it is 1/2 an industrial metal and 1/2 a ‘monetary metal’. Finally, it’s a very “thin” market. Not much production and wild demand swings. So it can show extremes of volatility that the other metals may not reflect as well.
So what do we see in that chart? First off, we can see the “bubble phase” near the start. Then the collapse back toward middle of the chart. Next we get a small wobbly ‘rise’ off that crash, then it ends in a very rapid collapse. Matter of a day or two. It is that speed with which silver and gold can collapse that causes me to be very early out of the metals and to avoid parabolic rise spikes (especially a late entry into them). You can lose months of “trend” in one “Gap down open”. (Or in this case, two.)
I also like this chart as we see SLV end up starting and ending at almost exactly the same places as RUT, but with a lot more volatility on the way. If you know how to trade volatility, that can make a pile of money for you. If you want an investment, it is terrible and can cause psychological trauma. Silver and metals trading are not for everyone, and silver is worst in many ways. (That “thin” market issue, and being driven by both industrial and monetary issues along with crowd dynamics).
Look at Vol+. In the bubble drop, the volume was immense. In the latest drop, not so much. Not a lot of buyers stepping up even at those plunge prices. In the parabolic rise into the first bubble, volume (black) does a parabolic too. Then the spike down has a red spike in volume to match. In the latest collapse, it’s just a bit of red spike. There was not a lot of volume build into this, it was just a normal “volume drying up” top, followed by a gap down on a load of sell orders and no buyers lined up. Look at the July / August border. Volume dries up, then prices plunge. Look at Mid August. Low volume (black) as we approach the top, then a larger red spike on the drop. Early September has slowing volume. Folks are just staying away in droves. Even in the plunge, not much really happens.
Oddly, that implies it might be a good time to buy silver. Market Makers are shoving prices down, way down, as they are buying the silver being dumped. For a trade, it’s a reasonable gamble to do a ‘friend of the market maker’ trade here. For an investment, we need to wait for some signs that a ton of silver is not still falling on us… With MACD below zero and Red On Top, it’s not time yet (on THIS time scale… a ‘day trade’ on a 10 day 15 minute chart might catch a bit of a Dead Cat Bounce for a few days). But RSI is approaching 20. That’s the “get ready to buy” marker. Now it needs to do a ‘steps higher’. THEN on the MACD crossover to ‘blue on top’ we could have a longer term “buy” moment.
But what does this price action MEAN?
It means that the industrial demand for silver has dried up (for now) and folks are sitting on inventory not wanting more. It means that “investor” demand is off as folks are still ‘smarting’ from that bubble burst and not ready to be burned twice. It means that folks without jobs don’t even buy silver jewlery as a ‘trade down’ from gold. And it means that those ads on TV didn’t rope in enough volume to keep things inflated.
How low can Silver go? In really bad times, down to about $5 an ounce. We’re at $30 now, so still downside risk.
In short, Silver is saying “not a good economy and folks are cutting back on spending of all sorts”.
Now look at stocks. The RUT is in a long down trend too. The Dow Jones DIA is only 30 stocks. A highly biased selection. QQQQ the Nasdaq is strongly biased by a high exposure to AAPL Apple Computer. The NYSE Composite has a load of overseas companies in it via ADRs (American Depository Receipts). The SPY S&P 500 is usually my favorite index to track (as it has a nice broad mix of large companies, so outperforms the ‘typical’). But to see how the broad economic picture is going, I look at the Russel 2000 RUT Index. Here we see if the “little guys” who make most of the jobs are getting better, or getting crushed.
Well, not looking so good…
The one good thing is that the last couple of months it’s not managed to crash through the 20% loss level. (If you can call that good…) From my point of view, it’s a ‘sideways roller’ and you can ‘range trade’ it (sell at the higher area, buy at the lower) but I’m not seeing anything in the way of good economic news reflected in that chart.
Now look at TLT. Long duration Treasury Bonds. Folks are flocking to ‘near no yield’ treasuries. They are scared. Now if the folks who sling $1 Billion a DAY (like the Omani investment guy who was on CNBC) are scared, well, it’s not a good sign. Only folks of that size can move bond prices. (Though the Omani guy was buying things like BAC Bank of America… but he had a bit of tremble in his voice and a sideways glance when he said it; like he was not so sure it was a bright thing to have done…)
Furthermore, The Fed has said they are going to roll $400 Billion of short duration notes into 6 year to 10 year bonds. As they do that, TLT will reach a peak (probably a bit before they are done). So while I’d NOT invest in TLT for a couple of year horizon, it ought to continue to be a ‘safe haven’ until The Fed is done and the economy looks better (like THAT is going to happen as Greece leaves the Euro Zone… I give them 3 to 6 months max to decide they would really rather have an inflating Drachma and not a German Master and tax hikes.) As soon as the trend breaks, shift to TBT (whenever the economy shows recovery and The Fed starts raising rates).
Before jumping into TLT at this point, one ought to look at a TLT Bonds chart specifically and look for things like “RSI near 80” as a warning shot… so this is a statement about the economy and NOT a specific “buy bonds now” statement, ok? Me? I’m in cash.
Now, a broad look at metals in general:
The main ticker here is JJC Copper. We see it dropping fairly hard. Copper is a clear indicator of economic demand by builders and manufacturers. It’s off a cliff and with a volume spike. Even worse are JJT and JJN, Tin and Nickle. About the same are Aluminum JJU and Lead LD. Not a lot of lead and aluminum in home construction. This is broader than that…
Holding up better had been the ‘semi-industrial semi-precious’ metals of Platinum and Palladium. (Folks will remember that up until about a month ago I was “hiding out in Platinum” then exited about that last ‘lower high’ point). They drop when demand for catalysts falls off. Think car catalytic converters and manufacturing of chemicals and oil products.
At the top of the chart is Gold, looking very much like a broad bubble slowly turning into a bear trend. I’ve not done a specific gold chart lately as I’m not in gold right now (and not going to be). I think you can see just from looking at it that things have not been looking good for gold for about a month now. What’s likely to happen going forward? Depends on how bad the global economy becomes, but I’d use that last silver bubble and rebound as a model (but stretched out and broadened as gold is not so thin a market and moves more slowly… most of the time.)
The simple fact is that when things start dropping, hedge funds and countries must sell gold to pay their failed bets or cover their currency manipulations. You “sell what was profitable” when you get a margin call. And folks got a lot of margin calls lately.
It looks to me like metals are saying the global economy is “not so good” and precious metals are being sold to cover debts. The announcement by China that things were ‘not good’ caused a couple of days of flat out panic in the metals.
It’s time to start watching them for a confirmed bottom (then buy…) but for now, it’s still a bit early. To buy (eventually) you will need cash, so be in cash now to buy cheaper later. On a ‘trade basis’, this steep a drop is likely to have a short term bounce back up (measured in days or weeks) so traders could shift to a 10 day hourly chart for a ‘counter trend rally’ swing trade. I’m not going to do that just because it requires fast timing and I have a day job now, so can not ‘play’ mid day. That means I’m exposed to “gap opens”, and I’m just not interested in that right now.
Some live charts for your amusement and pondering:
The primary industrial demand metal indicator. Whenever a recovery comes, remember “Buy More Copper!”, now not so much…
Panic and fear can overcome any trend and the “story” never stands up to the economic cycles. But a fun ride as long as you remember to “Never ride a position down. If it moves against you, sell; THEN ask questions. -E.M.Smith” or my preferred “short form” of it: “Think IN CASH. -E.M.Smith”.
IMHO, early stage “failure to advance” and “first time below the SMA stack”. IFF I were the sort of person to “expect at” charts, I’d expect price to challenge about $1700 and fail, then fall away to the downside as the bear trend resolves. Then again, with the way gold in internationally manipulated, one central bank deciding to dump dollars or euros and buy gold could scratch that, so the best expectation is that gold is expensive and volatile at these levels and not worth the ‘play’.
Held up nicely until “Son Of Double Dip Panic” returned and folks started expecting a plunge of industrial demand.