Base Metals vs Gold and Silver

I’m going to be making a set of “standard live chart” postings that will be in the stock charts category. There will not be any analysis or description of the status or meaning of these charts, just a live chart that will change over time.

For analysis or meaning, look at particular postings in the WSW series or the Economics and Trading category.

Why do this? It effectively replaces the function of the “Racing Stocks” tab up top. Not only have all those links been broken (thanks to BigCharts changing their URL structure) but the statistics say nobody but me used the tab as a tool anyway. This will also let me make the WSW posting much more efficiently as it will just have a constant format with a link to the standard chart page. Any static charts I want to save, I can save via a download of the image. This will also let me put notes about any particular type of trade vehicle with the chart, so I do not need to repeat them from posting to posting.

It will take time to get all these in place, just like it took a long time to build the “Racing Stocks” tab in the first place. Along the way I’m going to update some of these for changes in my interests and market changes, too. You can click on, or open, the graph to get a much larger one that is easier to read.

Base Metals vs Gold and Silver

Base Metals vs Gold and Silver

DBB  -  D&B Base Metals ETF
GLD  -  Gold ETF 
SLV  -  Silver ETF
JJT  -  Tin ETN 
JJU  -  Aluminum ETN 
JJC  -  Copper ETN
JJN  -  Nickle ETN
LD   -  Lead ETN
PALL -  Palladium ETF
PPLT -  Platinum ETF

The purpose of this chart is to let you see, at a glance, the major industrial “base” metals vs. the “money metals” of gold and silver.

Base metals move with the manufacture of goods. Often one of the early indicators of an upturn in economic activity is an upturn in the demand for base metals. Before the retail store can sell that electric drill for Christmas, it had to be shipped, before it was shipped, it had to be made, before it was made, materials had to be bought (i.e. metals for things with batteries and motors or metal skins). Ahead of that step is more shipping, but from mine to refiner, and as many miners and refiners are integrated, it is hard to get visibility into that via a traded stock ticker. Then, prior to that mining, someone had to place an order to buy the metal.

For that reason, the metal price tends to move first, then the miner starts mining more, then the chain of shipping and production begins, followed by more shipping and then retail sales. It is a good idea to watch industries in more or less that order as an economic cycle turns.

There is a minor caveat to this. It can sometimes take a while for aggregate demand (i.e. sales) to generate enough new metals demand so as to move prices. Especially if the industries tend to stockpile their resources. While the west has generally moved more toward a “just in time” inventory model, China has gone to more of a ‘strategic buying and stocking’ model. For this reason, you may well find that metals prices move with ‘when the Chinese Commissar says to increase the stockpile’ rather then with actual demand for finished goods.

So keep an eye on shipping and retail even as you check metals…

Most of the industrial metals move together. The “money metals” have a life of their own, but as Silver is used in many industrial products, it tends to re-converge with the base metals over time. When you see divergence between the money metals and the base metals, it is often a bubble worth riding, but watch out for the inevitable “POP!” at the heights of happiness…

Platinum and Palladium are “semi-industrial” metals. They have some use in jewelry and coinage, some use in “store of value” hedges. Mostly their price varies with their use as industrial catalysts. In particular, moving with the sales of automobiles (smog control) and oil refining / petrochemical processing. During times of inflation, platinum can run ahead of gold. During times of a Gold Bubble, it tends to sell below gold.

In general, base metals have long term moves based on the economic production cycle. When the economy is ‘in the dumps’ but starting to recover is usually the best time to start buying positions. When the economy is going great, and has been for a while; just about when The Fed decides to “cool it off” or if a major economic slowdown / collapse looms: that’s usually the time to sell, when things are good but before the collapse of demand.

In Little Orphan Annie there is a scene where Daddy Warbucks hears that a war is likely starting, he hits the phone and orders “Buy Copper! I need more COPPER!!”. That’s as valid now as it was then.

Metals can dribble along a bottom for a long time. As long as the “downturn” lasts. Mines will shut in capacity when prices are too low and this tends to enforce a price floor (near the lowest cost to produce of the available mines). For this reason, watching mine loadings would be an even better indicator of new demand than prices, but that data is often proprietary or time delayed as it filters through government agencies.

So watch the base metals and they will tell you about the broad economic condition and aggregate productive activity in the economy. Precious metals will tell you more about social trends and central bank actions. There is a relationship between those two, but it is hidden behind the doors of The Fed conference rooms…

ETN is an Exchange Traded Note – holds options and futures. These are NOT long term investments, only trade vehicles for short duration. The "time value" of options evaporates in months so there is a constant leakage of 'value' out of these funds into options time decay.

ETF is an Exchange Traded Fund. In theory these hold real assets and can be held longer term. In reality, there are many trade related behaviours that can cause an ETF to have risk. In downtrends a fund may experience forced redemptions, so forced to sell a position at a loss or at a bad time. This is especially seen in bond ETFs where forced sales can eliminate the stability of the average principle.

For GLD and SLV, those ETFs are significant holders of real metals. In the case of redemptions of the ETF, these forced sales can cause significant oversupply to the market and drive down the underlying asset. During bubbles, such buying can force prices higher. So "first big guys out" may cause all the slower sellers to have a significant loss. In general, though, for broadly traded assets like currencies, these effects are not evident.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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