Metals fatigue – what is the damage?

The enormous sell-offs in the metals complex over the last couple of weeks has inflicted technical damage on the major metals charts - let’s have a look.

In conjunction with our piece from yesterday (Europe merely one of the potential powder kegs this week?), let’s have a look at how much damage has been done to the metals complex, where the bull market has suffered a tremendous setback. So far this appears to be “nothing more” than a huge positioning adjustment in a market that got ahead of itself, particularly in the gold-as-safe-haven trade. The copper market is a bit more complicated, as the red metal has been used in all manner of collateralized credit shenanigans in China aimed at avoiding official credit/lending constraints in the banking system. Many have speculated over the risk of mass physical metal position liquidation (the metal has been piling up in world warehouses due to its extensive financialisation in recent years) if the price dropped too far. Let’s have a look:

Chart: Daily Copper price
On the daily chart, it is clear that the fall to a new low below the important $3.90/lb. level (the low of the year) unleashed further emergency selling. How much pressure is this exerting on those in Asia participating in copper-collateral financing schemes? Could pressure from the copper price act as a brake on economic activity just as financial market turmoil was the source of a slowdown in the US economy back in 2007 and early 2008? Also - is copper the leading indicator for the metals complex?



Chart: Weekly Copper
On a longer term, logarithmic price chart, the damage appears a bit less impressive, but we’re still seeing by far the largest sell-off since the late 2008 meltdown and the entire excursion above the old high marked with the blue line appears to represent a false top. Note that the 200-week moving average has suddenly come into view (black line)



Chart: Daily silver
The daily silver chart showed a more sudden slide recently (more in line with gold, which we show below – note that the 200-day moving average was taken out rather definitively by this move.



Chart: Weekly silver
Note that sell-offs of similar magnitude (percentage basis – always a must to look at a logarithmic chart of an asset that has appreciated by orders of magnitude over the chart’s time horizon.) have taken a considerable amount of time to “overcome”. The sell-off after the first go at the 15 dollar level back in 2006 took almost two years to surpass and the early 2008 high took some two and a half years to overcome, so even if we remain in a long term bull market, this sell-off may have inflicted damage that will take some time to overcome based on previous lessons. Of course, central bank and government policies that impinge upon trust in fiat currencies will remain a critical factor for the precious metals in particular.



Chart: Daily gold chart
The gold bull have suffered a tremendous setback here as the vicious sell-off has reversed most of the rally since early summer. The Friday close the week before last was 1811 – hard to believe we’re trading closer to 1611 just 6 trading days later. Note that the 200-day moving average has proved an important tactical support overnight just above 1500 after suddenly coming into view  after the CME raised margin requirements over the weekend.



Chart: Weekly gold
A weekly, logarithmic chart of gold makes the damage look far less impressive, though the blue line does indicate that the 2008 sell-off in gold triggered by panic deleveraging (gold went from 1032 to 682) took more than a year and a half to overcome.  A sell-off of similar magnitude on a percentage basis would take gold back to below 1275, just for perspective.