Inundated with news alerts and opinion pieces drawing attention to the demise of the gold and silver market, it’s difficult for even seasoned commodities investors to maintain optimism. At a certain point, fear can get the best of people, especially when the fundamentals have seemingly betrayed all notion of rationality and that the U.S. Federal Reserve, against everything that is logical and sound, has succeeded in politicizing their way out of trouble. Surface-level appearances in this case can be very deceiving, with investors needing to judge all facts before committing to an actionable strategy.
Several articles on the faulty premise of the Fed’s quantitative easing program have been written by the staff of Future Money Trends and its associated companies, with a general consensus reached that the enormous imbalance between untenable fundamentals and euphoric technicals cannot move forward in perpetuity. Nevertheless, it is worth reminding ourselves that under the fractional reserve banking system, only the flow of money via adjustment of interest rates can be artificially affected by a central bank. In other words, banks are in the business of deferring obligations over a particular time period; they do not actually create growth with their convoluted schemes.
Part of the euphoria in the equities market is a misunderstanding by common investors towards the aforementioned concept. The other part is that with overall lower volume in the financial markets, investors stand to make the most money in sectors in which there is heavy government or public support. This has created a deflationary cycle within the commodities market as money shifted away from out-of-favor sectors.
But the recent surge in copper prices have not only been encouraging, they may also signal a secular turnaround away from deflationary pressures. As a purely industrial metal, copper’s fortune is heavily tied to macroeconomic conditions, or more properly worded, to speculation towards macroeconomic conditions. Thus, it’s interesting to note that unlike gold and silver, whose respective value is more linked to a monetary and intrinsic basis, copper’s spot price has been trading inside an inclining trend channel since bottoming in mid-March of this year. At a time of writing price slightly north of $3.00, the most precious of base metals stands a good chance of exceeding its 50 day moving average and reversing years of “step-down” formations created by dramatic shifts in economic outlook and Fed guidance (or non-guidance as the case may be).
The most recent move for copper was accompanied by heavy volume, another indication that this may be more than a flash-in-the-pan. Reliable technical indicators such as the Relative Strength Indicator (RSI) and the Moving Average Convergence-Divergence (MAC-D) have confirmed that, along with the underlying price action, supporting momentum has driven the market in a sustainable manner. That means that while the volatility is still intense during times of selling pressure, the copper market has consistently held true at expected price support levels. This provides not only confidence in the copper market specifically, but also towards related assets such as gold and silver bullion.
Ultimately, copper’s technical chart may be pointing towards an inflationary whiplash response towards current deflationary trends. While the Fed has aggressively pumped liquidity into the system by buying bonds at unprecedented rate, very few amongst the general public have taken the offer of “easy money.” For millions of Americans, the recession has emphasized the importance of saving and not taking on more debt, sending prices lower as demand dries up. Lower demand will eventually eat cut profits for nearly every industry, incentivizing the Fed to once again open the monetary spigot. Professional copper investors may be speculating on just such an event to occur, signaling a potential resurgence across the vast metals complex.