Macro: Sandcastle economics
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Silver and copper in focus after recent declines
Ole Hansen
Head of Commodity Strategy
Summary: Silver prices hit a two-month low on Monday, with the trigger being a technical break below key support while the driver was an ongoing risk aversion towards metals depending on growth and demand, not least in China. Copper meanwhile remains rangebound with China growth concerns being offset by the prospect for a tightening market outlook with miners cutting production forecasts amid harder-to-mine deposits and rising costs. In this update we also take a look at recent investor positioning and how they may impact the short-term outlook.
Silver prices hit a two-month low on Monday, with the trigger being a technical break below key support while the driver was an ongoing risk aversion towards metals depending on growth and demand, not least in China, the world’s top consumer, where the economic outlook continues to darken with stock markets in Hong Kong and Shanghai hitting multi-year lows. With gold continuing to attract support above $2000 in anticipation of rate cuts, lower inflation and continued central bank demand, the XAUXAG ratio has risen to a 15-month high, reflecting silver’s relative cheapness.
Since early December when silver, together with gold, saw a premature and unsustainable spike, the price has suffered a relatively steep fall, culminating in Monday’s technical drop below support-turned-resistance at $22.50. With gold holding steady around $2025, the gold-silver ratio briefly spiked above 92 (ounces of silver to one ounce of gold) before bargain hunters appeared to provide support. For the market to recover its poise a break back above $22.50 is the minimum requirement, with the steep downtrend from December offering a later challenge just below $23. A sustained break lower could see short sellers target channel support in the $21.50 area.
Just like gold, silver has seen net selling from ETF investors since 2022, when the Federal Reserve embarked on its aggressive rate hike cycle, with current total holdings at 694 million ounces being the weakest since May 2020. Meanwhile, in the futures market, speculators such as hedge funds and CTAs held a 6,000 contract, or 30 million ounce long in the week to January 19, not far below the one-year average around 11,000 contracts. Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
Copper meanwhile remains rangebound with China growth concerns being offset by speculation the Chinese government will have to do more to support an ailing economy, and not least the prospect for a tightening market outlook as the green transformation continue to gather momentum and miners cutting their production forecasts as they being challenged with harder-to-mine deposits, rising costs, water restrictions and increased scrutiny of new permits.
Industrial metals have generally posted a weak start to the year as the outlook for global and not least Chinese manufacturing and construction activity still is under scrutiny, for now more than offsetting calls for stronger stimulus measures in China, and the potential positive impact of restocking once an expected series of rate cuts from major central banks begin later this year. The Bloomberg Industrial Metal index trades down around 4% on the month with losses being led by aluminum and zinc while copper, for the above-mentioned reasons has managed to limit the losses, despite some recent aggressive selling from speculators in the futures market.
According to the latest Commitment of Traders report from the CFTC, speculators had during a two-week period to January 16 shifted their net position in the HG futures contract from a 10k long to a 25k short, the biggest bet on lower prices since July 2022. Combining this observation with a volume weighted average price (VWAP) during this two-week selling period around $3.8050, and the risk of another short squeeze may attract fresh attention should the price manage to break higher from here. We maintain a positive outlook for copper given the prospect of an increasingly tight market towards the second half of the year, but given current China worries and ongoing speculation about the timing, pace and depth of incoming US rate cuts, the short-term direction will likely be decided by short-term trading strategies.
HG copper is currently trading near the center of a 40-cent wide range, and following early January weakness the market is now showing signs of consolidating with a band of key moving averages offering resistance between $3.79 and $3.825.
Commodity articles:
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity Weekly: Geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
22 Jan 2024: COT: Commodities short-selling amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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