November 8, 2017
While it is widely believed that commodities are one of the few "undervalued" sectors, sustained rallies have been hard to find over the past few years. Could all that be finally beginning to change?
The key to any commodity rally is weakness in the US dollar. Most commodities trade in dollar terms so a rising dollar generally puts pressure on the sector. In contrast, a falling dollar is usually good for the sector. As you can see in the chart below, the general trend since 2015 has been a flat to falling US dollar as measures by the Dollar Index:
It could be argued that the two most globally-important commodities are copper and crude oil. Let's start with copper where, for the past year or so, we've been following a growing bottom and breakout on the chart. Does this look to you like a bear market or a reversal and switch to a new bull market, instead?
And now look at WTI crude oil. Note the similar chart pattern to copper. Could a move into the $60s be construed as a breakout and renewed bull market after a three-year bottoming process?
With dynamic rallies already underway in other commodities such as zinc and palladium, the question becomes...Are we in the early stages of a renewed bull market for commodities, in general? On the chart below of the the Continuous Commodity Index, you can see the possible beginnings of a turnaround.
What might this mean for silver which, despite its long history as a monetary metal, is now currently perceived primarily as an industrial metal and considered a "commodity"? If we view Comex silver through the same five-year lens, we note a reverse head-and-shoulder bottom, similar to those seen on the charts of copper and crude. However, we also note that unlike copper and crude, silver has yet to begin a rally of any consequence.
What to make of all this? Actually, it seems rather simple. Should the commodity rally continue, it will begin to take on a life of its own, with global money managers and asset allocators recognizing the new bull market and creating a virtuous cycle of higher prices through their inflows of cash to the "undervalued" sector. In this case, copper will move higher and toward $4.00 while crude oil breaks through $60 and heads toward $80.
If this happens, we could imply a price of silver that easily reaches the mid-to-upper $20s sometime in 2018. Is this possible or would/will The Banks be able to keep their collective thumbs on the price? Your answer to that question will depend upon the size and scale of the cash flow into the sector.
So again, it may be rather simple. Resolution of this will be a function of the dollar, copper and crude. Forecast those three for 2018 and you'll likely be able to correctly forecast the price of silver, too.