Copper Signals and Silver

Some of the regular readers of this site will remember that the battle royale occurring in the copper market between the two groups of the largest speculators in the market has been an unending source of interest to me. To see the powerful hedge funds arrayed on one side of the market ( LONG ) while the other Large Reportables ( big pit locals, CTA's, CPO's, etc. ) are on the other ( SHORT) is not something that one sees all that often in the commodity futures markets, especially in this day and age of computerized system trading.

In looking over the chart of the price and the chart of the positioning of these large traders ( COT ), one can readily see that each side has inflicted some wounds upon the other based on the rise beginning in the middle of June and then on the fall since last July.

As things now stand, we are back to a near perfect equilibrium between the two sides with their respective net long and net short positions being nearly equally balanced.

The reason I am fascinated by this is because it reflects the continued lack of consensus among the big speculators as to the true state of the global economy.

Those that are bullish and positioned on the net long side ( hedgies ) are playing the inflation genie and a slowly improving economy with increased demand for industrial type metals such as copper.

Those that are bearish are playing the "deflation genie" and a deteriorating global economy accompanied by falling commodity prices along with a strong US dollar.

It is this shifting sentiment which is wreaking havoc among some of the trend following systems and has sent some of the individual commodity markets into their current range trade or sideways pattern.

Clearly, investors/traders are looking at some signs of economic improvement but they are also seeing geopolitical events and other factors which are making them second guess themselves. There is no clear cut conviction outside of the equity market traders as to which way things are going.

One cannot dispute however that the overall commodity sector has been under severe pressure of late. A simple glance at the Goldman Sachs Commodity Index tells the story there. Copper has been effectively taking its cues from this index of late.

Along this line, do you not find it rather bizarre that in spite of the severe downdraft occurring in the commodity sector, in spite of the sharp selloff that has been occurring in copper and in spite of the fact that the US Dollar has been rather resilient of late, we are still being regaled with articles decrying the "Blatant attacks on Silver" ,etc.

I cannot help but wonder about some of these folks who are evidently blind to the fact that everything else around the metal is sinking lower. Yet, for some strange, inexplicable reason, they somehow expect silver to be rocketing higher. It is somewhat akin to watching a wild hog digging around for edible roots. The poor thing cannot see that well to begin with but it is so focused on what is right in front of its nose, that it does not bother to see anything outside of that area of small focus. Such are those who keep talking silver manipulation while the entire commodity complex is now down strongly on the year.

Take a look at the Silver COT chart and you can easily see what is taking place. There is nothing sinister here but rather the dawning realization on the part of some hedge funds ( perhaps some of the same that were long copper) that they are on the wrong side of the trade and are now getting out.

Look at the size of that big bet the hedge funds had made on higher silver prices beginning back in June. They built that net long position up to the largest in 4 years only to have the metal careen back to earth after the entire commodity complex began to swoon. Simply put - the hedge funds were playing the "inflation genie" and surging global economy theme and just flat out missed it. Now they are abandoning ship. As they head for the exits, the price is coming back down after making an advance of about 3 Dollars since early June. It has given back $2.00 of that as the hedge funds exit.

By the way, this is an opportunity to once again point out the folly and absurdity of too many of these self-anointed Commitment of Traders "expert analysts" and other sundry, assorted charlatans who had assured us all that a spectacular silver short squeeze was just around the corner because "their analysis of the COT data informed them that the big swap dealers were positioned on the net long side and that implied a big short squeeze coming". Of course we all know how accurate that worthless "analysis" was.

I have said it many times before and will say it again - extrapolating future market movements from the COT data alone is an exercise for fools. Only by studying a broad array of factors, such as the other similar markets, the Dollar, interest rate expectations, and then key technical chart patterns and resistance and support areas, can the COT data be used to any sort of trading advantage. Taken in isolation, as so many of these novices and would-be somebodies seem to do, it is great for selling newsletters and subscription-based web sites, but for real life trading strategy, it is utterly and completely worthless. I have to shake my head that some would part with their hard-earned money to pay for the kind of "analysis" that they are getting. It is quite tragic to be honest.

Take a look at the following chart in which Silver is being compared to Copper. Pay not so much attention as to the general price levels but rather the overall price patterns of the two metals. Notice how similar their movements are and have been. They both tend to fall in unison and sink in unison.  Yes, there is not a one for one or a perfect symmetry between the two but the similarities are quite remarkable are they not?

The point is simple - markets do not trade in isolation. Anyone who claims that he or she knows what is coming next because they have examined the Commitment of Traders data and therefore can dogmatically assert "such and such must follow" is fooling not only you, but themselves as well. When one puts real money on the line and takes a position in the market, they should do so not on the soothsaying of some short-sighted "expert on the COT" but rather through diligent study of the charts.

Lastly for now, here is that TIPS spread chart that I post every so often. It has been updated through yesterday. Notice the line of the TIPS spread which has been falling of late. This is an indication that inflation expectations are receding, not growing.

It is also the reason that I of the view that without support from these geopolitical tensions, gold would be following the broader commodity sector lower. Traders are buying gold as a safe haven against geopolitical turmoil and NOT against inflation. That warns us to be careful with gold for if the events which have led to this rise in a desire for a safe haven do recede for any reason, gold is vulnerable.

This is not meant to be a bias against gold nor is it meant to be a bias for gold. It is a simple observation that fundamental factors argue for a lower gold price while geopolitical factors are pushing it higher. We all saw today ( Friday ) how swiftly the metal will sink if those geopolitical factors are removed. It was only the reviving of fears over in Ukraine which saved the metal from falling even more sharply. Those who are buying it need to understand this. My own personal preference is to not buy gold during periods of geopolitical unrest but rather during times of relative quiet into levels of chart support and only as much as one needs for insurance or diversification purposes. Buying gold and chasing it higher when it is being event driven as it is right now, usually ends up burning those who do. One never knows if the event can indeed spiral out of control so if you do not own any, acquiring some is prudent. But if you are buying it during times like these, just understand that it can plummet back to earth as quickly, if not more swiftly, than it rose.

I will get something up on the corn and bean markets regarding the charts and the COT data as time permits tomorrow. have a nice weekend....