Bears Win the Copper Battle

Those of you who have been regular readers of this site know that I have been very strongly concerned over the divergence between what the copper market has been doing and what the rest of the commodity markets, but especially the equity markets, have been doing.

Equities have been making new highs as if there isn't a care in the world while copper has been among one of the worst performing commodities across the entire sector.

As I have said before, and will say again, this divergence is so abnormal, so strange and so uncommon an occurrence, that I believe we ignore it at our own peril.

Copper is the quintessential bellwether for global economic activity because of its widespread use in construction, both residential and business/manufacturing activity. If its price is sinking lower, it is signaling that economic growth is lackluster at best and slowing at worst.

With that in mind, look at what has happened since my last post about this.

Yes, it collapsed right through major chart support. I honestly did not think this would happen ( I thought it would bounce ) but the problems with China have gotten the copper market extremely nervous and it is definitely showing its cards. China has been the poster child for what a credit bubble looks like and we are now finally seeing some real evidence that the air is coming out of that bubble.

I must say that any news showing slowing growth in China, credit issues, rising bad loan problems, etc., is not bullish for commodities. You'll notice that silver opted to follow copper lower instead of gold higher. Gold, by the way, is only keeping afloat in my opinion because of geopolitical uncertainties concerning the situation in Ukraine. It is doing what it should be expected to do however during times when many desire a safe haven of sorts. It also is not hurting gold any that the Dollar has been a consistently poor performer of late.

Along the line of weakness in the commodity sectors, check out crude oil, which has lost more than $5.50/bbl over the last few trading sessions. Does this look like a chart showing a strong demand scenario which would be the case if economic growth were solid?

We thus have two key bellwether commodities both showing us signs of real weakness. I tend to rely more on the signals of these two markets ( plus cotton to a certain extent although weather issues can mess with it) to get a snapshot of where economic growth is more likely to go. We all can dismiss equities as a TRUE snapshot of the real economic picture ( thus it is and has been since late 2008 in my view) as that sector is driven almost entirely by yield-hungry hedge funds and large investment funds chasing yield in a near-zero interest rate environment. As said many times here, you cannot fight the tape as a trader and survive very long but that does not mean that the market will actually make any sense at times.

I see this lack of real growth as problematic for any sustained rallies in gold mainly because of my experience with the metal during the credit meltdown back in the summer of 2008. It got sucked down along with the rest of the commodity sector and did not live up to its name as a safe haven. It was not until the Fed announced their first foray into the realm of gargantuan money printing that the metal bottomed along with nearly everything else on the planet I might add.

The problem we have now is this boogerboo named deflation. It is still around to haunt us. This is not to say the entire commodity sector is going to implode lower. There are definitely exceptions to this at the current time, coffee and hogs currently among them, along with soybeans, which refuse to sharply break lower. Corn and wheat are both higher as well but they are being supported due to fears involving Ukranian grain shipments which many fear are going to be impacted at some point due to the conflict over there.

However, I still remain of the opinion that one of the fundamental pillars to a SUSTAINED bull market in gold is a bull market in commodities in general alongside of a weaker US Dollar and Negative REAL interest rates. It is difficult to make the case for any of the latter points with the exception perhaps of the US Dollar, which while it has not collapsed, certainly is weak on the charts.

That tells me to expect more of a grinding type price action in gold rather than the roaring, runaway moonshot which far too many of those in the perma-bull camp are anticipating. Only if we were to get the moonshot across the entirety of the commodity sector would I be able to concur with that theory.

You'll note on the gold chart that the metal is not falling apart like copper is but continues to lurk just beneath a key chart resistance level. Geopolitical uncertainties are making it tough for the bears to get aggressive and the bulls are not going away. The trend is still higher, but in a grinding sort of fashion as the ADX is moving higher but leveling off suggesting the waning of the sharp momentum seen earlier this year. I get the sense of a market reluctantly moving higher but not one in which there is unbounded bullish enthusiasm.

It will be interesting to see what we get this Friday in the COT report as it will cover the action in gold only through today's trading. Will we see more of that hedge fund short covering the dominant feature or will we see new longs outnumbering the short covering this time around?

By the way, don't forget that the COT report showed copper with all major category of large traders, including the Producer/User/Processor/Merchant  group all heavily short with the only buying being done by the Swap Dealers and Index Funds. I mentioned on Saturday that struck me as being extremely rare and quite odd - now we finally know the reason don't we?