Base and precious metal stocks experienced varying degrees of weakness on Tuesday in a reaction to news from China, along with a strengthening U.S. dollar. Gold and silver stocks, as measured by the PHLX Gold/Silver Index (XAU), were down by an average of 1.5% by late afternoon trading and were headed toward a lower finish for the day.
Copper, meanwhile, fared much worse with the July copper futures contract down over 4% late in Tuesday’s session. This decisively violated the widely followed (and psychologically significant) 50-day moving average for copper, which puts a temporary halt to its intermediate-term uptrend.
Reasons for copper’s weakness include the market’s concerns that the dollar in which the metal is priced may be strengthening, which would put downward pressure on the metal. The dollar index is up a little over 1% after bottoming last month at the pivotal 89.5 level, most recently closing at 90.5. While 1% may not seem very significant in percentage terms, it’s important to remember that currency market fluctuations are far less volatile than stock/commodity price fluctuations. Hence, even a 1% to 2% move in a currency like the dollar can have outsized impacts on metal prices.
As we touched on in the latest report (published earlier today), another factor that could be contributing to the metals market weakness is the recent shift in short-term inflation expectations. The 5-year breakeven inflation rate, which measures what participants expect inflation to be in the next five years, has been on a downward slope since hitting its highest rate in 10 years a couple of months ago. (See the June 15 report for details).
U.S. industrial production numbers for May were also released today and showed an impressive increase of 0.9% month-over-month, led by a 7% increase in auto production. This was above the consensus expectation of 0.6% and a sign that manufacturing activity is rebounding after being hampered by the Covid-related restrictions of the past year. Stronger industrial activity is widely considered to be disinflationary—and bullish for the dollar—and is therefore another likely reason why copper and other industrial metals were down.
The breach of copper’s 50-day line almost certainly accelerated technical-related selling, but the fundamental reasons for the decline can’t be ignored. It’s widely believed that if the Fed begins tapering the pace of its asset purchases (a growing possibility), it would strengthen the dollar and temporarily keep industrial metals prices range-bound. Plus, China’s threatened release of copper stockpiles is also weighing on short-term sentiment.
Nevertheless, the inflationary pressures we’ve been discussing in recent reports are still a major concern for the intermediate-term (6-9 month) outlook and should eventually come to copper’s aid. Continued strong demand for copper in the booming electric vehicles (EV), alternative energy and other industries should also contribute to copper’s longer-term strength.
What to Do Now
That said, the latest copper weakness was enough to stop us out of our trading position in Freeport-McMoRan (FCX) after violating the 39.35 level. If you haven’t already done so, I recommend exiting FCX as we build up some cash in anticipation of the next broad metals market buying opportunity.
Gold mining stocks, as mentioned above, were also down on Tuesday—though not nearly suffering the same losses as copper and copper mining stocks. Indeed, at least a few actively traded gold miners were making multi-month highs as recently as yesterday, including Seabridge Gold (SA), Vista Gold (VGZ) and Sandstorm Gold (SAND).
And while our trading position in Newmont Mining (NEM) has done fairly well, it’s time to get a little more defensive on the gold stocks. One reason for this increasing conservatism is the aforementioned strengthening dollar. But more importantly from a short-term technical standpoint is the internal condition of the broad gold mining stock market. The following chart “picture” is worth a thousand words.
The above graph shows one of my favorite indicator for the gold miners. It’s basically the 4-week rate of change (momentum) of the new highs and lows for the 50 most actively traded U.S. and Canadian gold stocks. As you can see here, it’s beginning to accelerate lower and as such suggests that there could be some increased selling pressure ahead for many of the stocks in this group.
This doesn’t mean you should dump all your gold stocks; far from it. There are still enough examples of relative strength in this area (including the three stocks mentioned above) to justify maintaining some bullish short-term exposure to this group. But I’m definitely recommending that we exit our trading position in Barrick Gold (GOLD) after it violated our stop-loss at the 23 level on Tuesday. I also suggest that we hold off on buying any new gold stock positions until the indicator shown above improves.
What to Do Now
Sell Barrick Gold (GOLD) after the stop-loss at 23 was violated. I further suggest keeping a close watch on Newmont Mining (NEM) in the coming days as our stop-loss at the 67.50 level (our original entry point) will likely be tested this week.