Commodity Prices And The Canadian Dollar

That ol’ Cando just does not seem to want to stay down now that crude oil hit the magic handle of “5” and commodity prices in general are moving higher.

Four times it tested the .7600 level and 4 times it ran out of sellers. All it took was a standing pat on interest rates by the BOC and rising oil prices and Loonie bears decided to get the heck out of Dodge.

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A couple of things about this chart – Price popped through the 10 day moving average today and managed to close above it for the first time since early this month. While it ran into selling at the 50 day moving average ( which we should note is ABOVE the current price) it did not fall back below the 10 day. That is short term constructive.

Also, the indicator in the second pane is hooking upwards and is on the verge of generating a fresh buy signal. Also, the DMI lines look as if they are about to generate a fresh buy signal as well. Given all that, I cannot be short the Cando down here unless I see it break through .7600 in convincing fashion. Here is what is even more important about this in my mind.

This is the Dow Jones/UBS commodity index. Are you seeing this?

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The index just put in a GOLDEN CROSS. That, to me, cannot be emphasized enough! This is hugely important as it indicates a massive shift in sentiment towards commodities in general and towards the overall discussion between INFLATION vs. DEFLATION. Guess what? If commodities have flipped the long term trend to BULLISH as that GOLDEN CROSS technical development signals, then the deflationists are now on the wrong side of the argument – at least for now!

Look at that chart again.

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Price moved about the 50 day in late February on a closing basis. That coincided with a buy signal. At that time, the movement in the index was generated primarily by short covering among traders who had been playing the DEFLATION/Slow Growth theme in the global economy and who decided that the actions of the Central Banks had done enough to stabilize the situation – not necessarily turn it around – but keep it from getting any worse. As they bought back their huge short positions across the complex, they pushed price higher.

What we had was a case in which they were NO LONGER BEARISH.

Price moved higher into mid-March at which time it then fell back and hit the 50 day moving average once again, this time from up above that level. The foray below this key longer term did not last long with prices shooting up to kick off the month of April.

In late April, price pushed past the 200 day moving average, a major LONG TERM technical indicator.

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Since that time, price has remained above the 200 day on all but 3 trading sessions.

Now, at the end of May, the 50 day has caught up with the 200 day and put in a bullish upside crossover to generate that GOLDEN CROSS signal. This tells me that finally, at long last, traders are NOW BULLISH commodities once again and thus are looking for improved growth prospects. On that basis, I want to be long the Canadian Dollar and am no longer interested in shorting it except for the shortest term of trades. I wanted to pull out on this commodity index chart to show you the longer term view of things.

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Look back and note on August of 2014; that was when we saw the dreaded DEATH CROSS take place in this index. That is not something out of “Star Wars” but rather when the 50 day moving average crosses down below the 200 day moving average.

It is a signal that the LONG TERM PROSPECTS of the sector were decidedly bearish. Think about this for a moment. For almost two full years now, we have seen commodity prices tumbling lower and lower. Now, we are seeing a transition on the chart telling us that the long term prospects for the sector are decidedly bullish.

This has profound implications to me since it tells me that consumers and businesses can now expect to see the cost of tangible goods begin to slowly increase as an asset class. Note well – this does NOT MEAN that we can suddenly expect soaring commodity prices and hyperinflation. It simply means that we have seen the worst for commodity prices as an asset class, as a whole.

The question now becomes what the Fed make of this. I personally believe that they are quite pleased with themselves as they have finally managed, after a long time, to set in place the ingredients for higher inflation. It will first show up at the wholesale level as measured by the PPI. Then we will wait to see at what point businesses feel confident enough about their customer base to pass those costs onto their customers. Then it will show up at the consumer level in the CPI.

This factor has implications for both gold and silver, but perhaps not in the way that some might be thinking. I have long argued, and I believe correctly, that during periods of slow growth/deflation, gold will outperform silver. Silver needs an inflationary environment in which to thrive or at the very least, a GROWTH environment. It simply will not perform well during periods of deflation – and by the way, that has NOTHING TO DO WITH ANY SUPPOSED PRICE MANIPULATION scheme which the likes of Butler, et. all, are constantly haranguing us all with as their tongues parade through the earth proclaiming that idiocy.

It has to do with instead, silver’s role as both an industrial metal and a precious metal. During deflationary periods, silver seems to be more in line with the price direction of copper, aluminum, tin, zine, and platinum/palladium ( there are exceptions for brief periods). As such it moves lower and loses ground to gold, which is truly a save haven metal of ancient repute.

If however growth prospects are picking up, then investors/traders are going to be better rewarded in favoring silver over gold.

Here is a look at the Gold/Silver ratio. Notice the extreme to which it had risen earlier this year when slow growth concerns, China, the Eurozone, the US stock markets, etc, were all the rage. It reached a high of near 83.

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It has since moved lower, falling below 72 before rebounding to near 76 this week. It slipped somewhat lower today. If commodity prices begin a general trend of working higher over the next few months/years, I would expect this ratio to fall. That means gold will lose ground to silver.

Here is an extended version of this same ratio chart.

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Note the extreme levels to which gold pushed out over silver. If you call 88 the high ( I am not being statistically accurate here but just using quick calculations) and 32 the low, even a move back towards the middle of that range would put the ratio back to 60. That is a pretty big move.

All of this makes me closely scrutinize the price action of silver down here near current levels. If traders are convinced that economic growth prospects are picking up, they are going to be favorably inclined towards silver. This is why I have been detailing the COPPER market so much of late.

Copper is showing signs of having bottomed out. IF it starts moving higher, it is going to be very difficult for silver bears to really lean hard on silver prices.

In looking at the silver chart it seems to have temporarily found support near $16.25, and this is with that massive hedge fund long position hanging over the market. Tomorrow we will get a better sense of where things stand on that although sadly it will not include the big down day on Wednesday.

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Along that line, this week’s high near $16.60 takes on a great deal of significance in my mind. If prices push back through that level, I am going to go ahead and exit those July $15 puts I have been holding as the odds would shift for them coming into the money.

It is still too early for right now to know what exactly is going to happen in there but with these other developments in the commodity sector in general taking place, shorting silver may not be the wisest play except for all but short term trades.

The jury remains out but I am watching for signs of the verdict coming in. The big thing for me will be whether or not silver, ( and for that matter , copper) can shrug off any negative reaction that might normally be expected to come from a stronger Dollar and move higher in spite of that. If they do, no more short silver positions will be warranted, at least in my view unless proven otherwise.