Gold jump closer to it’s highest level in around seven weeks on Monday. The yellow metal has now retraced over 50% of the main move down from July of 2016 to December of 2016 and over 75% of the move from 1298.80 on June 6th of this year to the interim low of 1204.00 on the 10th of July. Meanwhile, copper futures rallied to their highest level in more than two years after data showed that growth in China’s manufacturing sector cooled slightly in July, but a government-led infrastructure push kept construction humming.Silver is up 11% in the month of July. Platinum has rallied 5.6% since July 11th and Palladium is only $26 dollars from it’s all-time high.
To say metals have broken out would be overstating the case, as silver is still in a long-term downtrend and gold has at best moved sideways within a large range since April. Saying metals have quietly become the market to watch however, would not be. Given commodities in general have a negative correlation to the dollar (re; more than 8% rally in crude oil in July) metals may be telling you more than you are willing to hear. The dollar index has been on a one year decline and shows no signs of abating. The past 7 months which has produced 6 down months out of the 7, is the steepest decline since 2010 and with very shabby visual research, one of only 4 times in has moved lower this fast for 6 months or more, in 20 years.
Now it certainly could flatten out or even reverse, but watching metals tells you it may not. According to the CFTC commitment of traders report, open interest in metals (specifically gold) has been increasing and shorts have been decreasing. Chinese PMI construction data came in very strong based on government spending, so even though the headline manufacturing number was a slight miss, metals got a bid.
If we were looking at just gold, one could say the move higher is geopolitical (Trump white house chaos, North Korean missile tests) but that’s a very small part of it at this point. Here is a 20 year gold chart with corresponding arrows to the dollar index above.
Gold certainly went higher during he corresponding periods, but the regular ebbs and flows you see in the dollar index chart is not there, telling you correlation is not tick for tick. Some gold spikes are geopolitical, some are short term supply and demand and still others are driven by pure dollar devaluation. When all metals move higher (and all commodities for that matter) that is global economic growth combined with expectations of mild monetary tightening. Given the poor showing of US CPI and the recent miss on Q2 GDP, the US Fed will be mild if not down right timid. If overseas growth continues and the US slows, metals have a lot more room to go up…and the dollar has more room to go down.