COMMODITY FUTURES FORECAST
WEEKLY REPORT
Metal Back On Track?
Philip Gotthelf
For a brief moment, metals seemed to be stalled. In particular, we sold the bust in May copper with hopeful anticipation as prices declined to test the 20-day moving average. Given copper's prior strength, a true technical signal would have been confirmed by a dip below 12200...the 40-day average. But, I was becoming anxious about a copper price that touched 14000 because the last time we saw these prices copper collapsed like a meteor falling to earth.
Circumstances are very different. The last time copper soared to $1.40, Summitomo was squeezing the market. This time, the market appears to be squeezing the market. Still, $1.40 copper translates into major demand. This implies explosive economic growth which the government denies. Somewhere along the line, reality must eventually surface. Is it a boom or will copper bust?
I was incorrect in following the technical consolidation in silver, too. The damage was limited, but we missed the breakout above $7. I was suspicious of silver's formation because it has been led by gold. Since gold's chart lacks the same upward enthusiasm, I am not comfortable with silver's performance. Still, one cannot deny the technicals.
Look at a May chart. Retrospectively, we can assume the move from 54500 to 68000 represents a large continuation "flag" with a 50¢ range projecting to 73000 after the breakout above 68000. The problem is that it would be nice to buy the current strength. However, the 73000 objective has already been achieved.
Last month's bust to 63000 was a real fooler. It dropped below all three moving averages and, in conjunction with gold, looked like the beginning of the end. Bingo! The market turns around. Had I the courage, I would have recommended a reversal stop or buy on a breakout above 68500.
In contrast, April gold has formed a downward channel bounded by 40400 on the upside and 38770 on the downside. Lower highs and lows defines a downtrend. The dollar did not bust along with stocks and falling interest rates because Europe's economies are under pressure and the consensus is for a decline in European rates that control the Eurocurrency.
Can silver sustain itself as gold declines? Historically, these metals trend in tandem. This is why it is difficult to imagine $10 silver when gold drifts lower.
Silver fundamentals are static for now. There is no "new" silver production because the low price of the metal made primary production unfeasible. It is cheaper to extract silver from copper, tin, lead, zinc and nickel mining. Silver would need a rally above $9.50 and a sustained price in that vicinity to encourage companies to open primary silver mines. I do not see this in the long-term fundamentals.
Kodak announced its intention to move away from traditional film photography and into digital imaging. It's a story I've been telling since 1987. It is finally acknowledged by silver advocates that digital imaging has taken a serious bite out of silver demand. Assuming metals remain divorced from monetary valuation standards, silver's prospects appear bleak. On the other hand, silver is a poor man's gold. Inflation can easily ignite powerful interest in the white metal.
The long base can be construed as a setup for a rally beyond $10.50! Wouldn't that be a surprise? In other words, silver has been in the doldrums so long that a breakout would necessarily exaggerate the extent of any sustained rally.
As remarkable as this may seem, I remain skeptical of silver's ability to move appreciably higher from current levels. Having touched 73000, there is a strong possibility of major profit-taking that can return silver to a pattern more in line with gold.
Volatility has been problematic as seen by our stop-out in April platinum. Prices blasted through our 90750 stop to a 92400 high, and have retreated back below our stop. Unlike gold, platinum relies upon industrial demand as its main support. The monetary relationship is linked to gold and silver. According to the largest refiner/processor, platinum's range for 2004 should be $100 less than the current price. Thus, platinum is fundamentally "overdone" above $850/oz.
The inclination to pick tops in this type of environment is overwhelming. Rather than follow the "buy strength/sell weakness" mantra, we look for the slightest sign that the inevitable turn is upon us. Alas, it can cost us dearly. But if we are fortunate enough to time our top selection correctly, the rewards in this volatile environment build at exponentially high rates.
The U.S. Dollar Index has formed a potential downward consolidation with good upside potential on a breakout above 9050. We were long the Dollar Index and I really thought we were on our way. Alas, conservatism moved me to protect against losses by moving the stops to entry. While I'd rather be stopped out at breakeven than suffer a loss, we face the difficult decision on whether to pursue the same strategy moving forward from current levels. Neither the dollar index nor the Eurocurrency has significantly run from our entry. We are forced to June. As Martha Stewart would say, "That's a good thing!
Not The "I" Word!
Since the beginning of the year, I have avoided the equity indices because it has been extremely difficult to obtain an accurate technical "read" of these markets. Despite a bullish sentiment, stocks barely eked out a gain in January as I reported in my early February report that discussed the famous (or infamous) "January Effect." At issue was the quantification and qualification of a "gain." I cautioned that the extremely modest progress made by most indices suggested that the January Effect might not be in play for 2004.
As a chart reflects, the distance from January's open to its close was substantially diminished by a late-month correction. Now, investors are asking why stocks should continue higher or why they should not. The opinions are as varied as the stars.
At the forefront of the bullish case has been the impressive cash flow seen entering mutual funds over the past month. The economy is allegedly "picking up" and stocks are destined to benefit from renewed economic strength.
Whether a coincidence or not, I appeared on CNBC with Ted David at 10:20 to discuss the commodity markets in general and the inflationary tone being set by rising raw commodity prices. Ted's bottom line question was about the impact upon markets and, of course, whether it was too late to benefit from commodity speculation. My comment was inflation is bad for bonds and bad for stocks. Inflation forces interest rates higher which, in turn, negatively impacts fixed income while dampening enthusiasm for equities. In the meantime, economic trends (i.e. growth and global wealth accumulation) are likely to place continuing pressures on limited commodity supplies.
Consider the numbers. Copper is up 90% since spring '03. The CRB Index is up about 20%. Soybeans have almost doubled. Crude oil has risen almost 60%. Silver is up more than 60%. These are not trivial advances. For the Federal Reserve to say inflation is low, laughs in the face of facts. Commodities are inflating at unprecedented rates...across the board from energy to food to metals to lumber. This suggests that profit margins will be squeezed if the Consumer Price Index fails to respond to rising commodity costs.
The Wealth Of Nations
There is not a great deal I can include in a 3-minute sound bite. Touching upon a central theme throughout Senator and/or Candidate Kerry's latest vote-gathering efforts, we (the U.S.) must do something about exporting jobs. This sounds great in theory, but makes no sense in practice. Adam Smith's Wealth of Nations proposed the theories of mercantilism and economic equilibrium achieved through laissez-faire...leaving the economy alone. As with any progressive society, change is inevitable. In the present case, foreign labor represents a cheaper alternative to the domestic status quo. Thus, outsourcing is popularized.
This is not the first time politicians have raised the battle cry against progress in the name of votes. Recall the outrage over Japan's "dumping" of everything from electronics to cars at the expense of American workers. Japan, Inc. was poised to destroy the fabric of middle America...destroy manufacturing as we knew it. And, indeed, Japan did.
Yet, the U.S. economy survived and eventually thrived with the highest sustained employment and lowest inflation rate ever witnessed. It was a new phenomenon under President Clinton. Ah! Those were the days. Of course, Clinton did not have to deal with 9/11 on the heels of a post bubble stock market crash. Jobs were not a problem during his booming reign.
Just as politicians decried foreign factories in the 1980's, so do they scream about outsourcing now. But the fact is, outsourcing increases foreign wealth that returns to the United States as demand for our goods and services. How ironic it is to see India take away the computer help desk while buying huge quantities of U.S. technology to fulfill the job requirements of that very help desk! India has the largest Microsoft education programs in the world...second only to the U.S. (so I have heard).
China is taking away U.S. jobs, but also U.S. food. At some stage, I am sure higher food prices will catch Candidate Kerry's eye and he will blame Bush for allowing foreign interests to rape the U.S. consumer by buying our grain cheap and leaving us with shortages and rising prices. Don't mention the fact that U.S. agriculture has been in a price slide for more than three decades! Don't mention the fact that the last time we saw soybean prices this high was during the drought of 1988. Prior to that (Bush, Sr. event), grains reached for double digits in 1973. By the way, that was the Russian wheat deal.
The outsourcing trend is another phase in strengthening the U.S. economy by making labor more competitive. I know this comment won't win any friends from the unions, but history indicates these economic transitions are good for overall growth. The U.S. has been raided for everything from gold (before Nixon closed the gold window) to manufacturing (when Japan took away our auto and electronics dominance), to real estate (when foreign interests tried to buy half of New York City's commercial real estate).
Fear over the increasing wealth of nations has always been misplaced. We have fought wars over it. We have created panic over it. We develop election campaigns over it. In the long run, the wealth of nations drives the global economy and generally lifts the financial well-being of everyone...particularly the U.S. and Western Europe.
March 11, 2004
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey
201-784-1235
www.commodex.com
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