Long-Term Bullish Case for Metals, Energy
Chinese monetary tightening has undermined the industrial commodity complex, dragging down prices in energy and metals futures. The world markets' current fixation on Asian growth is misplaced, though, because American and European recoveries this and next year are likely to overcome any downturn on the other side of the planet.
Our dependency on Asia will continue for decades, but that peculiar relationship is still out of whack after the 2008 financial collapse. China survived the crisis much better than we did, allowing its economy to restart faster than our own, or Europe's. That imbalance is now easing, with the stage set for western economies to return gradually to their historic growth patterns.
In turn, I expect our reviving economy to support commodity prices and put a floor under declining futures markets. In addition, inflation pressures are likely to heat up, allowing gold to recover and break out to new highs. That rally could be phenomenal, with gold charging up to $1,800 an ounce over the next few years.
In the short term, however, industrial commodities are in full-blown corrective mode, with the likelihood of even lower prices before they recover and retest their rally highs. A few months of positive economic numbers on this side of the world should support the eventual turnaround and continuation of the rallies that began in early 2009.
Copper futures sold off from $4.27 to $1.27 in the bear market and bottomed out in December, 2008. It hit a 16-month high at $3.56 last month, then started to pull back, along with other world markets. The contract broke the 50-day exponential-moving-average support last Wednesday, closing under that price level for the first time since September.
This rollover could mark the first phase of a downtrend that drops prices toward 250. The decline is also affecting related equities, with
Freeport-McMoRan
(FCX) - Get Report
falling more than $20, or around 22%, after it topped out in mid-January. The stock is now bouncing, but considerable technical damage should limit the upside. As a result, longer-term positions aren't a good idea, to say the least.
I've been a gold bull for several years and was surprised by the intensity of the drop from the December high above $1,200. However, context is everything in the financial markets; this current decline, when viewed in context, is little more than a pullback to breakout support within a highly bullish long-term pattern.
Gold futures are bouncing with the broad market this week, however, the corrective pattern off the high doesn't look finished. The contract posted a low below $1,100 in December, and tested the low last week. This price action might look like a double-bottom, but a continued breakdown, followed by a swift recovery, would actually yield a more constructive pattern. As a result, I can't give an all-clear to interested gold buyers just yet.
Consider the similarities between the crude-oil consolidation patterns from last summer and from October to February. In both cases, the contract rallied to a notable high, pulled back in a steep retracement, then surged to another high. Both new highs failed, giving way to selloffs, with oil prices sliding back to prior trading ranges.
Here we are, with crude-oil futures back at the top of the summer trading range, attempting to bottom out and turn higher. The big question is: Can lightning strike twice, with a solid rally to new highs, such as we saw last October? Personally, I wouldn't fight the upside here.
We're entering a positive seasonal period. Winter is winding down, followed by the summer driving season. That isn't quite the influence it was a few years ago, due to crude's newfound reputation as the final harbinger for industrial demand, but it should help support a rally into my long-held target between $90 and $100 per barrel.
Natural gas has been the outlier in the commodity equation, failing to bounce after the bear market ended. It finally hit a tradable low in September, and has since been grinding higher in a choppy uptrend. The timing of the turnaround is highly suspect because it aligns precisely with speculation ahead of the winter heating season, as opposed to a shift in bearish fundamentals.
The natural-gas futures broke out above $5.40 in December and jumped quickly to $6, when the upside stalled out. The contract has spiked repeatedly against that level in the past two months, making no headway and threatening to roll over and break down. Any selloff through $5 should end the uptrend and fill the gap between $4 and $4.50.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in the stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
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