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U.S. Market: Commodity Index Points to Rally in Gold & Silver

July 16th, 2013 · Chris Vermeulen · 33 Comments

During the recent weeks we have seen commodities especially precious metals continue to drop in value. Market participant sentiment has become more bearish on commodities and couple that with a rising dollar it’s no wonder why we continue to see commodities as a whole fall in value.

Money has been flowing out of bonds at record levels this summer telling us most of market participants are feeling bullish on the stock market. This shift in sentiment of the masses are typical as they move their money from the risk on safer assets (bonds & commodities) and rotate into risk-on assets like stocks. While this is a bearish (contrarian sign) stocks could easily continue to rally for an extended period of time and possibly several more months before they actually top out.

Let’s take a look at the financial market business cycle diagram:

Bond prices have been falling for months and they typically lead the stock market lower. I feel we are starting to enter the phase where stocks will soon top and head lower also. Once this starts money will naturally flow into safer assets that are more tangible like commodities.

Keep in mind this cycle is very slow moving and rotation from one phase to another takes months. This is a process not an event but it is still very tradable.

JMCycle

 Now let’s fast forward to precious metals both gold and silver are likely to do in the next couple months. If you review the charts below you will see gold and silver bullion prices are looking primed for a bounce/rally from these deep oversold levels.

Gold Weekly Price

gold

Silver Weekly Price

sil;ver

Take a look at a basket of commodities through the GCC ETF.

GreenHaven Continuous Commodity Index Fund (GCC) is an Exchange-Traded Fund (ETF) that provides an innovative and efficient way to deliver broad based, diversified commodity exposure. It aims to achieve this by using futures contracts to track the Thomson Reuters Equal Weight Continuous Commodity Total Return Index (CCI). The CCI-TR is an equal weighted index of 17 commodities plus an additional Treasury Bill yield. Because of the equal weighting, GCC offers significant exposure to grains, livestock, and soft commodities and a lower energy weighting than many of its peers. In addition, GCC is rebalanced every day in order to maintain each commodity’s weight as close to 1/17th of the total as possible.

So, knowing metals are 24% of the index it bodes well for a bounce in the overall commodity index. Keep in mind this report is only focusing on precious metals, but many other commodities look ready to rally also like natural gas.

GCC-H

 GCC – Continuous Commodity Index Fund Weekly Trading Chart

The chart below shows a very bullish 4 year chart pattern. At the very minimum a bounce to the $29 is highly.

gcc

 Commodity Basket Trading Conclusion:

In short, commodities as a whole remain in a down trend. Until they show signs of real strength I will not be trying to pick a bottom. Several commodities are starting to look oversold and ready for a bounce like sugar, coffee, copper and natural gas.

Last month I talked about how a major market top is likely to unfold during the second half of this year. I still believe this to be true. But keep in mind these major market tops which only happen every few years are a MAJOR PROCESS. They take time to form and often we will see a series of new highs followed by quick sell offs as the market gets more people long as they big money distributes their shares/contracts into the new money rotating into the market.


33 responses so far ↓

  • 1 Biker // Jul 17, 2013 at 4:07 pm

    Who knows? I’m seeing little* of the ‘gold rush’ in Singapore we witnessed a year ago. None of the plaza and mall markets which were in evidence last year. From what I’d been reading, I’d expected to see queues… .

    * Nothing, in fact… .

  • 2 Stillgotshoeson // Jul 18, 2013 at 9:52 pm

    Well Focus have mothballed all their mines now until the gold price improves.. Exploration only at the present stage.

    http://www.miningaustralia.com.au/news/focus-minerals-closes-its-third-gold-operation-thi

    “The miner said it will return its focus to exploration efforts, with a view to restructure its operations when the gold price improves.”

  • 3 Greg Atkinson // Jul 19, 2013 at 6:55 am

    Stillgotshoeson that is quite interesting. I wonder how much supply is going to be taken out of the system when the higher cost gold producers start to stop production? I guess we should see that reflected in the World Gold Council figures near the end of this year.

    At some point, and I don’t know where that is, the supply and demand fundamentals should but a floor under the gold price. The complication as I see it is all that gold sitting in vaults.

    If Gold ETF investors keep selling, then things could get quiet nasty.

  • 4 Biker // Jul 19, 2013 at 9:49 am

    Or it could be very noisy…

  • 5 Lachlan // Jul 19, 2013 at 9:21 pm

    “gold sitting in vaults” for some reason people are obsessed with it Greg. No doubt its programmed into us through stories, movies etc. I don’t question it much, people think its money so it has to stay locked up and safe.
    There’s my gold trolling for the day… feel better now 🙂

  • 6 Biker // Jul 20, 2013 at 2:02 am

    I was in Little India today, Lachlan. I found one gold merchant in active-trade-mode, with two customers both looking at 18ct gold jewellery. The rest of the shops had no customers whatsoever.

    The gold-in-vaults issue is one of supply/demand… but even if all the major gold producers ceased mining tomorrow, that’s unlikely to create actual demand… although it would certainly put the brakes on supply. Confidence is a subset of fear… and it’s a lack of confidence in fiat currencies, Keynesian economics and government intervention which propelled gold to the dizzy heights it reached before it fell to earth. And when deflation (naturally) kicked-in, the hedging premise lost much of its impetus.

    Will we see gold (re)attain the high values it reached post-GFC? It’s possible… but having observed this whole cycle before, I don’t really believe it’s likely in my lifetime. The premise on which its rise was based has been shown to be flawed. What gold now needs is a next generation of buyers who haven’t seen the cycle repeated before, or suffered its volatility… .

  • 7 Lachlan // Jul 20, 2013 at 5:58 am

    Well written BP.
    I think gold will have to fall further to shake out the faithful physical holders I have observed around the net. The small guy with his stash of gold, guns and grub so to speak. I would not discount the possibility a situation where they are forced to trade it for necessities at lower real prices.

    I am sure the paper gamblers have left in fair numbers.

    Personally I am happy with my stash as insurance since it’s value as a speculation has been subdued in the short term.
    On the upside for gold is any disturbance of the bond market equilibrium. There is no doubting in my mind that if such an event were to occur that gold would go to the moon. Along with any hard asset perceived as safe. The thing is I only have a small amount of time for that conversation today. I see they are valid arguments but only when considered in full context of the actual situation. People have to come to grip with the reality that if it has not happened by now, knowing everything we do now…. about the level of distortion in the market, then maybe your crazy to believe it will happen next week for sure. Even if the truth is that it’s possible. Nobody really does know when such an event will happen. I would say one day and leave it there.

  • 8 Biker // Jul 20, 2013 at 7:39 pm

    Discussing all this with our eldest (whose returns in the first seven months of this year have eclipsed any returns we’ve made recently) we’ve agreed that The Perfect Storm for PMs would result from variations of the following: bond market crashing, sharemarket crashing, property crashing (regardless of the Australian situation, as it’s probably too small a market) and inflation rising… .

    We’re a little surprised to note that Melbourne property rose by over 8% in the last year, while Perth rose over 6%; not that these better-than-expected figures have/had any effect on PMs. Even foreign investment in Australian property would have very little effect on gold prices… if any at all.

  • 9 Greg Atkinson // Jul 26, 2013 at 7:47 am

    Lachlan I just read that the average cash cost for gold production at Newcrest Mining is $750 per ounce but of course they have higher and lower cost operations. I would guess that cash cost is much the same across the other big gold producers as well.

    For now the gold price seems to have stabilised so maybe the market is factoring in that the higher cost gold mining operations globally will shut down and that supply will tighten up a little?

    Also QE in the U.S, Abenomics in Japan and rumours of more stimulus in China will also help support the price as well.

  • 10 Lachlan // Jul 26, 2013 at 8:49 am

    Cracow Mine (Evolution) is a mine I drive past a bit Greg. They do about 100 oz/yr and have 5 yr current mine life. They are exploring to extend also but otherwise a good example of a profitable running producer. They have the same cost as you mention for NCM. I have no direct investment in them. I am not sure what the average here is.
    I am not sure either how this mining cost thing will affect gold prices altogether.

  • 11 Stillgotshoeson // Jul 26, 2013 at 9:54 pm

    EVN are a stock I hold and have recently increased my holdings of.

    22-Jul-2013 Buying XXXXX EVN.AU @ AUD0.715
    09-Jul-2013 Buying XXXXX EVN.AU @ AUD0.62

    “Evolution Mining Limited (EVN, formerly Catalpa Resources Limited) is a gold mining company focusing on mining and exploration operations in Australia. It owns and operates four gold and silver mines in Queensland and Western Australia and is developing a fifth gold-silver-copper project in Queensland.”

    FY13 Output across all mines (including Silver Credits) is 393k Ounces.

  • 12 Lachlan // Jul 26, 2013 at 10:51 pm

    They have Mt Rawdon too Shoes. I think it is a good mine…have not checked lately. Bulk mineable…I have been told they basically just ate a mountain. Nearby the township of Mt Perry where there is a very long tunnel you can drive your car through. I go through it occasionally…not for a few years but.
    http://www.abc.net.au/local/photos/2011/08/31/3306743.htm
    Lots of interesting stuff in the Aussie bush when we move slow enough to see around.

  • 13 Stillgotshoeson // Jul 26, 2013 at 11:09 pm

    Cracow 102526 Ounces FY13
    Pajingo 85918 Ounces FY13
    Edna May 86216 Ounces FY13
    Mt Rawdon 106089 Ounces FY13
    Mt Carlton* 12138 Ounces FY13

    *Mt Carlton yet to achieve commercial production

    Some figures are Gold equivalent.

  • 14 Lachlan // Jul 27, 2013 at 6:30 am

    Sweet little set up. Wish I had spare money to buy. Waiting for someone to turn the money tap back on at present.
    Coal miners are used to slow downs and expect to be cranking along again shortly. Up the road a bit from Cracow you have an Anglo mine you can see easily on google earth. Near Moura. That man made mountain range is destined to become 40km longer.

  • 15 Greg Atkinson // Jul 27, 2013 at 8:23 am

    Well the gold price has bounced back a touch so I wonder if it will follow a similar path as suggested by the weekly gold price chart posted above?

    Is anyone game enough to suggest at what price gold will find a bottom?

  • 16 Stillgotshoeson // Jul 27, 2013 at 9:30 am

    The US needs to raise the credit card limit in September and it is fairly clear that taper is not going to happen.

    I’m calling $1500USD/Oz by year end

  • 17 Stillgotshoeson // Jul 29, 2013 at 9:54 pm

    http://www.bloomberg.com/news/2013-07-28/silver-vault-for-200-tons-starts-in-singapore-as-wealthy-buy.html

    “The Singapore government has been promoting the country as a bullion-trading hub, removing a 7 percent sales tax on investment-grade precious metals in 2012. About 2 percent of world gold demand flows through Singapore, and the government aims to increase that to as much as 15 percent. “

  • 18 Greg Atkinson // Aug 2, 2013 at 2:52 pm

    I am still not tempted to move into precious metals at the moment and with gold currently trading at around USD 1,283.70/Oz getting to $1500 by the end of the year might require some effort Stillgotshoeson.

  • 19 Stillgotshoeson // Aug 3, 2013 at 8:18 am

    Sentiment can turn on a dime with precious metals Greg as we all know. It is only a rise of $200USD to get there. It could move that much in a week (up or down) with out any problems on a change of sentiment.

    It may not be until late September or into October that sentiment turns enough for the $1500USD, or it may not all… We will wait and we will see I suppose.

  • 20 Greg Atkinson // Aug 4, 2013 at 12:59 pm

    We also need to see if QE tapering is on, off or delayed. Surely the U.S. Fed must be worried about asset bubbles forming…or maybe not?

  • 21 Stillgotshoeson // Aug 4, 2013 at 11:12 pm

    The captcha seems to be playing up again too Greg. Can not post unless I log in, no matter how many times I enter captcha correctly it comes up with an error.. Others may be trying to post with out being registered and having the same issue so can not post.

  • 22 Greg Atkinson // Aug 5, 2013 at 7:47 am

    Sorry about that. Should be okay now. The captcha has now been disabled for comments. It is a constant battle against spam these days so it will need to be turned on at some point when it seems to be working again.

  • 23 Lachlan // Aug 5, 2013 at 6:15 pm

    Tried to answer your posts Greg but have not been able to post for a week. I guessed you’d get the better of that captcha soon.

    As usual I am staying long physical gold and do not intend to trade. I understand that prices may run against me for extended periods.
    Short term I think gold is setting up for a run to resistance at 1550 but beyond that its a hard call. I share Shoes sentiment in regard to sudden spikes in gold prices.
    As a trader vs investor, Chris in the article above is at liberty to change his bias if gold breaks significant resistance. The reason he makes money as a trader has as much to do with his risk management and flexible, dispassionate outlook as any ability to predict any prices. If gold fails at a key support then a technical trader might look for a low risk entry (top of a subsequent bounce to resistance) to short. If that idea fails because the price breaks through on the upside they simply change their trading bias to long or stay neutral until the market develops a clear pattern.

  • 24 Lachlan // Aug 5, 2013 at 6:20 pm

    Forgot I have a small ETF position to trade at some point. A failed short term trade for now. I might cash it in soon for break even just a little higher and re-invest in some super oversold shares.

  • 25 Lachlan // Aug 5, 2013 at 6:38 pm

    I see Chris predicts a major market top later this year. Many share classes have had a good run. So very possible.

  • 26 Greg Atkinson // Aug 7, 2013 at 11:45 am

    Lachlan it seems a lot will depend on the U.S Fed and the tapering (or not) of QE. Just a hint that money printing will slow sends U.S. stocks and gold/silver prices lower.

  • 27 Lachlan // Aug 15, 2013 at 3:15 pm

    There seems to be a divergence Greg. AUD gold has been forming a base. I am not saying it will eventually break down or up but for now its looks decent at least and reflects some AUD weakness. On the other hand USD gold has not got up the head of steam it really needs. USD gold may be destined to stay subdued while our AUD currency takes another dive soon and AUD gold is buffered somewhat. Maybe this taper talk will be played some more to help get the USDX a little higher with time. In the mid to longer term I still think the USD will be dropped and the AUD will rally hard again to higher highs. The current shake-out may have legs yet is all. Wait and see.

  • 28 Stillgotshoeson // Aug 17, 2013 at 10:08 am

    Gold broke $1500AUD/Oz and dropped back to just under last night.

    “Stillgotshoeson // Jul 26, 2013 at 9:54 pm

    EVN are a stock I hold and have recently increased my holdings of.

    22-Jul-2013 Buying XXXXX EVN.AU @ AUD0.715
    09-Jul-2013 Buying XXXXX EVN.AU @ AUD0.62”

    Now trading at 90 cents.
    Overall Precious Metal Miner holdings are still down but have begun to look so much better on my portfolio page.
    In my super they are up about 25% from just a few weeks ago, my portfolio outside super, they are up about 11%

    The FML I bought earlier at .012 are now at .016, FML still down overall but a lower overall average from buying small amounts as they got cheaper gives me an average of about 50% to the very first parcel of FML purchased.

    NST is another that dollar cost averaging has served me well and is now in front.

    The PM miners looked woeful not that long ago, now they just look bad 🙂 Some have good improvement though.

    Gold has had a reasonable comback, silver even better. $1500USD is looking good for year end.

  • 29 Greg Atkinson // Aug 21, 2013 at 2:09 pm

    Maybe gold is bouncing around a bottom in USD terms? Although I am still not a fan of gold at current prices maybe some of the gold mining stocks are worth looking at although the only one I have been game enough to venture into has been Newcrest Mining.

  • 30 Stillgotshoeson // Aug 26, 2013 at 4:14 pm

    Gold and Silver still having a good run at the moment.

    Retail sales from the US were pretty average and a big drop on the housing numbers means a strong likely hood of no tapering of QE yet. Debt ceiling negotiations to start soon too. Seems to be some lift to precious metal prices available for a bit longer yet.

    A pull back is always on the cards but I am still thinking longer term for PM’s is looking good.

    Not so sure about the US dollar though, Lachlan may well be right and we see a boost coming back to the Aussie Dollar on a falling USD

  • 31 Stillgotshoeson // Aug 28, 2013 at 4:44 pm

    AUD Gold over $1600/Oz now, not far from all time AUD high.
    Silver a long way to catch up to its all time AUD high but moving up nicely.

    A few ASX Gold miners had a bit of a sell off in early trade but gathered some/all of that back by afternoons trading.

  • 32 Stillgotshoeson // Sep 19, 2013 at 12:40 pm

    Well as I said back in comment 16 in July, tapering did not occur. The signs of life in the US economy are still the life support machine going “beep. beep” (visions of the monty python sketch about a very expensive machine that goes “ping”)

    Raising the debt ceiling should be a booster for Gold and Silver too.
    Volatility is going to remain though.

  • 33 Greg Atkinson // Sep 19, 2013 at 1:21 pm

    I recall a year or so ago Marc Faber venting about Ben Bernanke being a “money printer” and basically saying that printing dollars was the only plan Bernanke & the Fed had. At the time I thought it was a bit harsh but Faber was pretty much right on the money with that call.

    I was surprised they didn’t outline a plan to ease up with the QE this time but I guess they know that if they do it will send the markets into a tailspin. So now they just have to hope the economy bails them out before it becomes QE isn’t working any more.

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