Gold had a good year in 2017 as the yellow metal posted a 13% gain. Gold did better than silver and platinum last year, but it trailed palladium which turned out the be the best performing commodity of all, up better than 56% on the year. Palladium is the member of the precious metals sector that has the most industrial exposure, and industrial commodities responded to an almost picture-perfect set of inputs that launched many prices to the upside. In the industrial world, copper is often the bellwether commodity when it comes to the raw materials that respond to economic conditions around the world. On the first day of 2018, palladium traded to a high of $1090.45 per ounce, an all-time peak for the precious and industrial metal.
Copper had a great year posting a greater than 30% gain. Copper lead the base metals sector, and only the aluminum market posted a greater gain as it was over 32% higher on the year. Aluminum exploded as stocks declined in half over the year as the Chinese cut production to improve environmental conditions.
During the final month of 2017, both copper and gold experienced lots of price volatility that led to strong closes and a pair of trading patterns that could put them in positions to follow through on the upside in 2018.
Strength in copper continues
Copper has been in a bull market since finding a bottom in January 2016 when the price traded to a low of $1.9355 per pound. Source: CQG
As the weekly chart highlights, not only has copper moved from $1.9355 two years ago to a high of $3.3220 per pound at the end of December 2017, it has made higher lows that never violated the previous significant low during the period. After copper’s most recent peak, the price has moved back down to the $3.25 level in its latest correction which has become the usual trading pattern after each new high.
Copper has rallied on the back of three significant reasons. First, as the bellwether industrial metal, global economic growth has provided support for the price of the red nonferrous metal. Second, Chinese demand has moved higher over the past two years. At the start of 2016, when copper found its bottom, slower Chinese growth weighed on the prices of most industrial commodities as well as equities. After a swoon in the Chinese domestic stock market in late 2015 and early 2016, the S&P 500 index experienced a swift correction that took it 11.5% lower over the first six weeks of 2016. During that period, copper fell to its low. However, the introduction of a policy of the “new normal” in China where President Xi stated that markets should expect slower, but stable economic growth in the world’s most populous nation, stocks and the price of copper recovered. China is the demand side of the fundamental equation in copper and now that economic data has improved the price of copper has been making higher highs. Finally, tax reform and the potential for infrastructure rebuilding in the United States is adding another bullish influence on the price of nonferrous metals. Copper is a leader in this sector and has responded by appreciating over the past two years.
A turnaround in gold
The gold market has developed a pattern at the end of each year. Since 2015, the price of gold fell to a bottom during the final month of each year. In hindsight, when we string those three bottoms together they form a picture of higher lows. Source: CQG
As the weekly chart illustrates, COMEX gold futures fell to a low of $1046.20 per ounce during December 2015. In December 2016, the low was $77.70 higher at $1123.90 per ounce. Last month, the yellow metal also fell to a higher low reaching $1236.50, $112.60 above the previous year’s December low. Gold rallied off those bottoms for three consecutive years and in early January, the precious metal traded to a high of $1323 per ounce, over $85 higher than the low that occurred three weeks earlier. Gold turned around in the middle of December 2017 after it completed its pattern of higher lows during the month.
The price action in both copper and gold has been bullish over recent weeks, but the volatility of both metals caused a highly bullish pattern to develop on their monthly charts.
Bullish key reversals on the monthly charts
A bullish key reversal trading occurs when a market trades to a lower low than the previous month, and then proceeds to close the period above the prior month’s high. Source: CQG
As the monthly chart of COMEX copper futures shows, the price of the red metal fell to a low of $2.9205 in December 2017, which was below the November bottom at $3.0245 per pound. Copper closed December at $3.2950, which was above the November high at $3.1830 in a dramatic bullish key reversal on the long-term monthly chart. Source: CQG
As the monthly chart of COMEX gold futures illustrates, the price of the yellow metal fell to a low of $1236.50 in December 2017, which was below the November bottom at $1265.90 per ounce. Gold futures closed December at $1305.10 which was above the November high at $1299.00 in another dramatic bullish key reversal on the long-term monthly chart.
On a long-term chart, a key reversal trading pattern often is the prelude to a big price move. The last time we saw a bullish key reversal on the monthly gold chart was in July 2011, and the price rose from $1478.30 to a high of $1920.70 in September 2011. The price move of $442.40 from this December’s low would take gold to almost $1680 per ounce. The last time we saw a bullish key reversal on the monthly chart in copper was in October 2009, the price of copper fell to a low of $2.64 per pound during that month on its way to its all-time high at $4.6495 in February 2011. The price move of $2.0095 from this December’s low would take the price of copper to a high of $4.93 per pound. There are no guarantees that these markets will react as they did back in 2009-2011, but in the world of commodities, history tends to repeat.
A repeat of the previous two years in Precious metals
As the weekly gold chart shows, while the yellow metal found lows in December over the past three years, it took off to the upside at the very beginning of the year in 2016 and 2017. In 2016, the price rose from the December lows at $1046.20 to a high of $1377.50 by July 2016. In 2017, the move was smaller, but gold rallied from $1123.90 in December 2016 to highs of $1358.50 in September, and the precious metals made higher lows throughout the year. Over the first days of January, gold has been moving higher reaching $323 per ounce on the second trading day of the year. Gold appears to be attempting to replicate its trading patterns on the downside and the upside for the third straight year which could mean we are in for a test and perhaps break out above the 2016 highs at $1377.50 sooner, rather than later this year. Source: Barchart
While the GLD is the ubiquitous gold ETF product, IAU is around 1/10 the price, and it does a good job replicating the price action in gold. IAU is highly liquid with net assets of $9.7 billion and an average daily volume of around 9 million shares.
Copper and the global economy
Copper has been in bullish mode for the past two years and given U.S. GDP growth at 3%, tax reform, and the potential for infrastructure rebuilding legislation in 2018, the trend could be your best friend in the copper market these days. Critical support for the red metal stands at the $2.90 per pound level which is currently around 35 cents below the market price. Moreover, with the prospects for less copper smelting in China and cutbacks at mines over recent years, the bull market in the nonferrous metals sector could continue throughout 2018 bringing another year of higher highs and higher lows. Source: Barchart
JJC is the copper EN product that does a reasonable job replicating price action in the COMEX copper futures market. While at over $37 per share the ETN is close to its 52-week high, the chart dating back to 2008 shows that it reached a high of $61.69 per share in February 2011 when copper was heading for its all-time peak.
If the bullish key reversal trading patterns on the monthly charts in copper and gold are bullish omens for the markets, these ETF/ETN products could be the perfect way to pay for a continuation of higher highs without venturing into the shark-infested futures arena.
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