Metal Markets Setup for Critical Test

Andy Waldock |

We've been writing about the metal markets quite a bit, having recently published articles at Futures Magazine, Equities.com and TraderPlanet. We've seen major churning by the commercial traders which is indicative of a broader change in sentiment. Obviously, when it comes to the metals markets like gold, silver, platinum and copper, the major questions on everyone's mind is, "Have we bottomed?" We'll review the current setups in these markets and attempt to answer just that question.

There are two separate plays taking place within these markets. One is inflationary, primarily as it relates to gold and silver. The other is economically, as copper and to an increasing degree, platinum behave in a manner reflecting global economic growth or, contraction. We'll begin with the inflation play as the Federal Reserve Board failed to raise rates at last week's meeting.

The important feature of the gold and silver charts begins with the July-August build in the net long commercial trader position ahead of the most highly anticipated Fed meeting in years. Commercial traders were big buyers in both of these markets as they pushed to their summer lows as you can see on the charts below.

The commercial traders were big buyers at the summer's lows. Furthermore, the ensuing rally provided them with time to layoff accumulated contracts at a profit ahead of the September Fed meeting.
The commercial traders were big buyers at the summer's lows. Furthermore, the ensuing rally provided them with time to layoff accumulated contracts at a profit ahead of the September Fed meeting.

You'll notice the same pattern in the silver market below. Perhaps, more exceptional has been the commercial miner selling as this market approached its value area. This is a classic example of how the commercial traders provide support and resistance to a given market's meanderings.

Commercial traders have had success on both sides of the silver market. Ultimately, we'll have to determine if their recent selling is simply early profit taking or intensifies as the market heads lower.
Commercial traders have had success on both sides of the silver market. Ultimately, we'll have to determine if their recent selling is simply early profit taking or intensifies as the market heads lower.

Both the gold and silver markets could be building large bottoms. The recent sell off will be the key. If these markets begin to see commercial long hedger buying in defense of the lows, this could hold through the October 28th FOMC meeting.

Moving towards platinum and copper the picture shapes up just a bit differently. Platinum is turning into a hybrid investment vehicle. Platinum used to be a primarily speculative market driven by jewelers and the Russians. However, the last decade has seen  tremendous growth in diesel automobile manufacturing throughout Europe and Asia. The use of platinum in diesel catalytic converters has become a driver of the platinum market. This has shifted the hedging dynamic of the platinum market and placed automobile manufacturers and miners as the primary providers of support (manufacturers) and resistance (miners).

Treating platinum as a hybrid produces the following chart.

Platinum miners and automobile manufacturers have become the primary agents of support (manufacturers) and resistance (miners) in this market.
 

Platinum miners and automobile manufacturers have become the primary agents of support (manufacturers) and resistance (miners) in this market.

You can see that the action in platinum can be a bit choppy. As such, when we began writing about the bottom building in Platinum, we viewed it as a general area, "Platinum Nearing Major Value Area." The ensuing rally led directly to five straight weeks of net selling by the commercial traders.

Finally, moving to the most industrial metal of this category, we see that copper has followed the exact same path as the silver market. The correlation among the net commercial trader position has been exceptionally high between these two markets. Since I don't see copper becoming more precious, I can only assume that platinum is being treated as more industrial than precious. Finally, once again in the copper market, we can see how the commercial traders feed on their own support and resistance levels as copper's rally pulled an abrupt about face near $2.50 as predicted in Futures Magazine.

The copper market is bound by industrial supply and demand. Commercial traders rapidly soured on prices as they approached the $2.50 resistance level.
The copper market is bound by industrial supply and demand. Commercial traders rapidly soured on prices as they approached the $2.50 resistance level.

All of these markets have followed the same general pattern. Commercial buying through summer helped push these markets higher heading into September's FOMC meeting. The rally ahead of this meeting was met with considerable selling pressure as these markets returned from their oversold levels and headed back up towards their value areas. This action leaves the commercial traders near neutral as the metal markets attempt to determine if they'll head higher on inflation and global growth data or, whether they'll head to new lows on a deflationary low growth outlook. Either way, we expect their actions to provide us with clues to put us on the same side of the markets. Hopefully with equal success that we've come to enjoy this year.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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