"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Most of the readers of this site are market savvy enough to understand the connection between copper prices and the overall global economic picture. It is not called, "Dr. Copper" for nothing. All things considered, one would normally expect to see Copper prices moving in the same direction as equities. In a normal world, this would confirm that stocks are moving higher based on solid, economic performance in general while industrial demand and global growth keep copper prices supported.
That has obviously not been the case for some time now. Part of this is due to the increased supply of copper that came on line as a result of the push into the $3.75 - $4.50 price region. The response from miners was to ramp up production. This new supply has been unable to be absorbed at those formerly rich prices and thus price has been moving lower as copper seeks an equilibrium between supply and demand.
Price is now moving into a zone of strong support which has held the metal for well over a year now. Should this zone give way, and I want to emphasize that I am not saying it will, it would signify that in spite of Central Bank efforts to prop up global economic growth, such efforts are failing. I suspect that even the high-flying equity market would not be able to ignore such a signal for very long.
Take a look at a chart I have created comparing the price of copper against the emini S&P 500. Notice that since 2008, the general price movement of both items has mirrored each other. Copper prices have tended to rise and fall right along with equities. That is "normal". What is not normal is what we have had since February of this year when a huge divergence formed. While copper prices moved generally lower, stocks of course have been heading into the stratosphere.
How long this sort of abnormal disconnect can continue is anyone's guess but in my mind, it merely confirms the view of those of us who believe that the equity markets are nothing but a massive Federal Reserve-fueled bubble being supported only by huge doses of the bond buying programs of these Central Banks. Sooner or later, all markets tend to revert more to the norm. This is the reason why I am closely watching the copper market as it now enters the region of chart support.
Another reason I am noting copper because silver prices have tended to move more in sync with it of late. This goes back to that industrial component of the grey metal. If copper prices are not reflecting solid economic growth (especially in the realm of manufacturing), then silver is going to struggle UNLESS THE FOCUS OF INVESTORS SHIFTS TO ITS PRECIOUS METAL ASPECT. Even at that, it would necessitate a reason to buy the metal and that reason would be a shift in inflation expectations which currently are non-existent in the minds of the majority of market players.
We currently have these two factors therefore working against any sort of sustained rally in silver prices; namely sluggish economic growth worldwide and a lack of inflation expectations. If one or both of these factors shifts, then silver should find buying support. We do want to watch how copper handles itself if it were to drop into this red rectangle. If it can manage to bounce up and away from this region, we should see silver catch some of that as well and perhaps cement a bottom on its chart. Time will tell...
One of my favorite Sentiment Indicators has been and continues to be the Volatility Index or VIX. I prefer to call it the Complacency Index. Low readings, such as we have been recording for some time now, indicate the absence of investor fear or concern. High readings reflect worry or uneasiness. Sky high readings indicate PANIC.
I am not sure what is going on but the VIX has scored a five week high today for some reason. I tend to watch this indicator in conjunction with the action in the equities as a way to gauge any potential shift in overall confidence.
In my view, the only thing that can bring a firm bid into gold and reverse the current bear market in the metal is a heightening of fear/unrest/unease or better, a growing lack of confidence.
Yesterday we had a move higher in the Dollar. Today that has been erased. With the Dollar weakening gold is getting a bit of a bid today. Also aiding the metal is the sharp, and I do mean 'sharp' rise in crude oil. It touched $96 ( basis WTI ) in today's trade and is currently up over $2.00 barrel as I type these comments.
Let's continue to monitor the progress of the VIX and especially monitor the price action in the S&P 500. Upside momentum continues to wane in the latter market but then again it has been for some time now. I keep picking up one negative divergence after another but the market keeps shrugging those off with dip buyers continuing to come in. If the stock market does finally actually respond to one of these negative chart signals, I expect the VIX to jump even more. At that point we will watch gold closely to see if it can gather some better buying interest.
Stay tuned...
