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.
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Our Ask The Expert interviewer Craig Hemke began his career in financial
services in 1990 but retired in 2008 to focus on family and entrepreneurial
opportunities. Since 2010, he has been the editor and publisher of the TF
Metals Report found at TFMetalsReport.com, an online community for precious
metal investors.
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The views and opinions expressed in this material are those of the author
as of the publication date, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
accuracy, completeness, timeliness and reliability of the information or any
results from its use.
