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This Is How To Capitalize On Gold's Long-term Value In 2017

2016 has been one of the most interesting years for precious metals that I have seen in many years. Faced with a number of shocking developments and equally as surprising outcomes like the Brexit and Donald Trump becoming president-elect, metals have reacted quite differently as most analysts have predicted. We have seen a $325 move higher in gold from the lows only to retrace $200 inside of a month and Palladium futures jump nearly 30%, putting it up against some of the best performing asset classes in all commodities.

Late 2016 and 2017 is setting the stage for another important phase in the investing arena with our second, third and fourth interest rate hike. It is going to be interesting to see how gold and silver, zero interest yielding assets, perform while the dollar continues to catch a bid and the euro closes in on parity.

Bottom line: Precious metals have factored in these unusual outcomes and are setting the stage from solid long term support levels. With this being said, lets dig into it…..

Additional Resources

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Copper

One can see by looking a weekly chart that since mid-2014, copper futures have been in a steep bear market declining to long-term support at $2.00 in early 2016. This is interesting, because down at this long term level of support we see more value in taking long positions for upside potential rather than starting the next wave of a washout. The cost of production comes into play with mining operations profitability being questioned below $2.00 so stock piles in Shanghai and the LME become strained. The rest of 2016 can be considered the “lost year”, with a range of 25 cents until the November 8th election.

Now, copper futures are continuing to set the stage to become one of the best commodities of 2017 and a leading indicator of global economic growth. Looking at the performance from the election on Nov 8th, we saw a massive move from $2.10 until futures peaked at $2.74 on the March contract in little over a month. This shows the power of a shift in sentiment along with declining stock levels in Shanghai. China has set an economic growth target of 6.5% for 2017, and historically, they tend to set the bar low and exceed it as the year progresses. Right now, they are seeing higher government spending, a housing boom, and record bank lending. This equation should keep copper stocks tight and a bid flowing under the market.  

Gold/Silver Ratio

Is the Next Great Opportunity Found in the Gold/Silver Ratio?

For some commodities like gold and silver, it’s easy to look at the metals on an individual basis. However, this often paints only one side of the story. After a complete examination of gold versus silver at a ratio, you begin to get the feel for the market sentiment.

The equation is as follows:

Gold/Silver ratio = the price of gold per ounce divided by the price of an ounce of silver

After silver futures posted a low against gold in early 2016 at 82.5 ounces of silver for every ounce of gold, we saw the market finally say enough is enough. Gold had finally reached that bottom of $1050/oz and silver at $14.50/oz but just after something interesting had happened. Gold leapt to $1250/oz while silver had jumped just over a dollar to $15.15, leaving the ratio at 82.5.

I expect with 2017’s focus on rising interest rates and industrial metals demand, picking up once can cause the ratio to pull a 180 degree turn and close back in on historical, more normalized levels of the mid 50’s ratio, leaving silver in the bull market with gold the lager in 2017.

Gold

Looking at gold prices, all the concerns that once weighed on the market have come back to the forefront. Steadily rising interest rates are expected at the start of 2017, and the robust returns in the equities markets have caused a shift out of gold derivative Exchange Traded Funds and into other asset classes. The upward movement in the dollar and declining safe haven flow have also been a drag on the market. The old saying goes “the market falls twice as fast as it rises” maybe what we are witnessing with 7 months to rise $350/oz and only 1 month to fall $200/oz. The market has clearly washed out the basic speculator, and looks to be setting up another golden opportunity in 2017 once the damage is done. With calculated call option strategies becoming a more and more attractive option with a favorable risk to reward ratio, investors might want to brush up on their option knowledge.

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Silver

Like we have seen with gold, silver faces the same negative developments that have weighed in on ETF holdings with gold. Much of the liquidation has come in the last quarter of 2016, with pressure form a rising dollar causing most of the damage. Although I expect silver to face a number of headwinds in the coming year, the physical demand of the equation should provide a steady bid under the market. Industrial demand accounts for more than 50% of silver’s total demand, while medical and solar uses continue to grow.

While looking at the chart, classical wave analysis shows that the market is setting up for the next phase of a potential bull rally. With a 50% retracement underway from 2016’s peak to valley already behind us, there is a high potential for a positive 2017. Like gold, call options and calculated risk strategies are showing favorable risk to reward scenarios. You can also recall that the smaller contracts, like the 1000 oz. silver contract, are available and will offer the flexibility to build into full size contracts over time. Look for a cup and handle formation on a daily chart for an entry signal with proper risk management.

Additional Resources

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Platinum/Palladium

These two metals tend to operate differently than gold and silver, with fundamentals weighing heavily on developments in Russia, South Africa, and demand from China’s automotive industry. It is important to monitor supply vs demand where demand has remained strong for most of 2016. Be sure to monitor the effects of rising interest rates with the automotive loan industry. This may dampen demand within the U.S. and effect platinum more than palladium. Sanctions in Russia have become more relaxed with the implementation of a new Presidential cabinet, and we may see exports of palladium accelerate.

Remember futures trading always involves proper planning and execution. My motto since I started has always been to “Plan your trade and trade your plan” and before I forget I always keep a commodity calendar and monitor RJO’s Market insights to stay on top of important global events. If you haven’t ordered a complimentary 2017 Commodity Trading Guide & Calendar, we have received a shipment of them. This is your “go-to” resource for Government & Industry Report Dates, Futures and Options Expiration Dates and more than 350 charts and graphs. *Available to U.S. residents only.

You can request yours here:  2017 Commodity Calendar Trading Guide

By Phillip Streible
pstreible@rjofutures.com
www.rjofutures.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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