Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Silver and copper tandem run continue
Ole Hansen
Head of Commodity Strategy
Summary: When silver is not paying attention to gold and the dollar it tends to get a great deal of its directional input from copper. This has been the situation in recent months when both metals suffered sharp corrections driven by a combination of recession fears as central banks step up their efforts to curb runaway inflation, China growth worries, a stronger dollar and a general level of risk adversity. However, the combination of China showing signs of recovering, demand for mining assets and speculators holding elevated short positions have all helped support a change in sentiment.
Silver’s March to July 32% tumble to a two-year low seems to have attracted some fresh appetite for the half industrial and half precious metal. Up until recently it had been weighed down by a forceful combination of recession fears, aggressive rate hikes by central banks, the Chinese property sector crisis hurting copper, a stronger dollar, and a general level of risk adversity. When silver is not paying attention to gold and the dollar it tends to get a great deal of its directional input from copper.
Following a temporary recovery in the price of copper around the beginning of June when China began easing lockdown restrictions, the rally quickly ran out of steam and copper went on to tumble below key support before eventually stabilizing after finding support at $3.14/lb., the 61.8% retracement of the 2020 to 2022 rally. It was this extended weakness that helped drive silver to a two-year low and in the process also a two-year low against gold. However, in recent weeks the gold-silver ratio has dropped from 94 ounces of silver to one ounce of gold to the current 86.8 and from a technical perspective a break below 85.65 could see the ratio begin to target 83, thereby signaling another +4% outperformance against gold.
The recent outperformance against gold was extended on Monday after silver managed to break above its 50-day moving average, a level that now provides support at $20.33/oz while the next level of resistance is not far away at $20.85/oz, a break above which may signal a potential extension back towards the June high around $22.50/oz. Just like the downside was driven by industrial metal weakness the recent bounce has been supported by a recovery in copper.
The potential for an improved demand outlook in China and BHP's announcement that it has made an offer for OZ Minerals and its nickel and copper-focused assets, is the latest in a series of global acquisitions aimed at shoring up supplies of essential metals for the energy transition. With its high electrical conductivity, copper supports all the electronics we use, from smartphones to medical equipment. It already underpins our existing electricity systems, and it is crucial to the electrification process needed over the coming years in order to reduce demand for energy derived from fossil fuels.
Money managers and other large speculators have, because of weeks of price weakness, accumulated a net short position in both metals. Before the latest recovery in risk sentiment towards the two metals, funds held a 54.4k contracts gross short (red area in the charts below) in silver, the highest in three years, while the gross HG copper short had reached 66k contracts, a 28-month high.
While speculators have been scaling back copper short positions in recent weeks, the price action has yet to challenge those looking for another recession-focused sell-off. For that to change, the price of copper as a minimum need to break above $3.69/lb., the 38.2% retracement of the June to July 31% correction. As per the chart below, only a return above $4/lb. would signal the prospect of a return towards the March record high.
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