Precious Metals In A Rough Sea For Commodities Prices And A Flash Crash

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Includes: AGQ, ASA, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DUST, DZZ, FTAG, GDJJ, GDX, GDXJ, GDXS, GDXX, GEUR, GGN, GHE, GHS, GLD, GLDI, GLDW, GLL, GOEX, GTU, GYEN, IAU, JDST, JNUG, MELT, NUGT, OUNZ, PALL, PGM, PHYS, PPLT, PSAU, PSLV, PTM, QGLDX, RING, SGDJ, SGDM, SGOL, SHNY, SIL, SILJ, SIVR, SLV, SLVO, SLVP, TGLDX, UBG, UGL, UGLD, USLV, USV, ZSL
by: Andrew Hecht

Summary

Gold flash crash, silver follows but both recover.

Palladium has been making strides.

Platinum looks a lot like the rest of the commodities market.

Energy andagricultural commodities are weak.

Commodities are searching for bottoms.

In January 2017, the U.S. dollar index was trading at the highest level since 2002 when it hit 103.815 on the active month futures contract. Since then, the reserve currency of the world has made lower highs and lower lows in a corrective move against other foreign exchange instruments. The dollar rally started in May 2014 as the U.S. central bank tapered its program of quantitative easing, and when they began increasing the Fed Funds rate from zero percent in December 2015. The Fed acted again in 2016 and so far this year, there have been two increases with another on the way and perhaps three more coming in 2018.

Typically, a strong dollar is a bearish indicator for raw material prices. However, when the dollar hit its peak in January, many commodities were still on their way to higher prices as optimism about economic conditions for the future sparked demand. However, as the U.S. currency has been falling over recent months, many raw material prices have ignored the traditional correlation and have declined. The most actively traded precious metals, gold, and silver have been following the dollar and are holding about technical support levels these days even though many other commodities prices have been falling despite the decline in the dollar index which is down by over 5% so far in 2017. Most precious metals have been holding in a sea of losses for the commodities sector.

Gold flash crash, silver follows but both recover

Gold was holding near the middle of its trading range until Monday, June 26 when a huge spike in volume hit the COMEX gold futures market at 9:00 AM London time. Source: CQG

Over the course of a ten minute period, over 30,000 contracts or more than 3 million ounces of COMEX gold futures traded with some reports of a 1.8 million ounce sell order hitting the market like a ton of bricks. Traders are offering different analysis when it comes to the massive selling that took the price from the $1255 level all the way down to lows of $1236.50 per ounce in the blink of an eye. Some are blaming it on a mistake, perhaps a high frequency or computer generated trade that went awry. The fat finger syndrome has caused these types of moves in other markets in the past. Still others are blaming the move on a large sell order that underestimated the market’s ability to absorb the quantity of the yellow metal in such a short time. Gold recovered back to the $1245 level soon after but not before the precious metal suffered from technical damage as it traded to the lowest price since May 16 on the August futures contract.

Silver went along for the ride to the downside, with volume of more than 8,000 contracts or almost 43 million ounces. Source: CQG

Gold’s little brother fell from around $16.65 to lows of $16.225 before recovering back to $16.55 in short order during Monday’s trading session. The trading ranges since the middle of March in both gold and silver have been from $1217.80 to $1300.30 and $16.06 to $18.725 per ounce respectively.

It has been a rocky road for precious metals, and I am sure that the most recent flash crash activity will increase speculation by many that market manipulation played a hand in the price action on Monday. However, the two most actively traded precious metals remain in their respective trading ranges with the dollar index trading around the 97 level and going nowhere fast these days.

Palladium has been making strides

Palladium was the best performing precious metal in 2016, as well as in the first quarter of 2017. Source: CQG

As the weekly chart of NYMEX palladium futures highlights, the price is at the $864 level on September futures and $880 on the expiring June futures. Palladium which closed at the end of March at just under $800 per ounce will likely once again sit atop the precious metals sector as the end of Q2 and the first half of 2017 comes to a close this Friday. Palladium has been making great strides on the upside as it was trading at the $450 per ounce level at the beginning of 2016 and is now approaching double that price. While palladium has been a star, platinum continues to be a dud.

Platinum looks a lot like the rest of the commodities market

Many commodities prices hit their highs for 2017 in February and March of 2017. Platinum was no different. Source: CQG

As the daily chart of NYMEX platinum futures illustrates, the rare precious and industrial metal reached its apex for the year at $1050.40 on February 27 and has been making lower highs since. The price action in platinum, which has been the dog of the precious metals sector, is more reflective of moves in many other commodities markets over recent months as the price was trading below the $920 per ounce level on Monday.

Energy and agricultural commodities are weak

Gold and silver are holding in their trading ranges; palladium continues to trade near recent highs while platinum is the one commodity that is moving with the rest of the raw materials pack. Source: CQG

Crude oil has declined from over $55 per barrel at the start of 2017 to a recent low of $42.05, and it continued to trade at just over $1 above the lows on Monday, June 26. Source: CQG

Copper has dropped from $2.84 on February 13 to its current price around the $2.6250 per pound level. Source: CQG

Iron ore, the industrial commodity that is the primary ingredient in the production of steel has fallen from over $83 per ton on February 21, to its current level at $55.43. Lumber is down from highs of $417 per 1,000 board feet on April 10 to the $366 level. The Baltic Dry Index has declined from over 1300 to under 900. It is not only the industrial commodities that have seen declines. The agricultural sector has dropped like a stone. The price of soybean futures is trading at the lowest price since January and corn has fallen on weaker energy prices. Soft commodities like sugar, coffee, cocoa, cotton, and even frozen concentrated orange juice have all posted significant losses over recent weeks. Despite the price action in the dollar, which has corrected from almost 104 on the dollar index in January to the 97 level, commodities have been weak, almost across the board. At the same time, gold and silver have held up pretty well, and while platinum has gone along for the bearish ride, palladium has been a bull all the way through.

Commodities searching for bottoms

It is likely that we will read a lot about Monday’s flash crash in gold and even silver over coming days. The conspiracy theories will abound. However, I believe the two most actively traded precious metals have been doing ok as both remain in their trading ranges at a time when bearish forces are taking the rest of the raw material sector lower. When it comes to the remainder of the commodities sector, I would not be surprised to see a rebound in the coming days and weeks. In the case of many raw material markets, prices moved to highs on optimism about infrastructure rebuilding and fiscal stimulus in the United States at the end of 2016 and in early 2017. While they have declined as that optimism turned sour because of the difficulty the administration in the U.S. is having with their legislative efforts, the other side of that sword could be that the Fed will find itself in a position where rate increases may slow down in the months ahead. Despite the recent hawkish tone by the central bank, economic data is showing that the Fed may have to slam on the brakes when it comes to tightening credit. A shift from hawkish back to an accommodative Fed in the U.S. could push the dollar to new lows which would support the prices of many raw materials. Meanwhile, when it comes to gold and silver, they are in a holding pattern and the price action these days is not all that bad despite a fat finger or a sell order that caused a few brief moments of panic.

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