Gold/Silver: Laser eyes on China, copper, and crypto
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
It was an ugly week in almost all asset classes, with one by one falling like dominos. What seemingly started with a tech-driven selloff spilled over into cryptocurrencies and ultimately found its way into precious metals. The culprit mainly points to how various countries are handling the skyrocketing inflation. The U.S., for instance, has set on the path to beat inflation by instructing the Fed to aggressively raise interest rates at the expense of new homeowners and the stock market. That new cost of capital is the main reason the Nasdaq is down 29% since its November highs.
China's strategy to tackle inflation is to decrease demand by extending lockdowns which have essentially crushed the industrial metals complex. Remember, China accounts for 54% of the Global copper demand. On the other hand, China cannot raise borrowing costs, which is evident from the recent developments of its fourth-largest property developer defaulting on its bond payments.
Daily copper chart
Daily silver chart
Daily gold/silver ratio chart
To put the correlation into perspective between copper and silver, I want to highlight the similarities between the technical analysis pattern starting from the April 18th highs. At that point, the correlation between copper and silver eclipsed that of gold and silver, resulting in a breakout in the Gold/Silver ratio. Therefore, if you are holding silver, your performance will likely reflect that of copper. To help you with technical analysis and identifying trends, I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold but can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.
Additionally, many of you may not agree with another headwind in the precious metals space, and that's human behavior. Given my experience communicating with thousands of precious metals speculators over the years, I have noticed another similar set, and it goes like this.
Gold and silver, unfortunately, are sometimes the victims of other market behavior. Individuals that invest in the Nasdaq and tech often invest in crypto, as do the parent companies within the Nasdaq. They invest in crypto to "fight inflation and find safety from a reliable long-term store of value." Similarly, those with that same mentality often invest in gold and silver. Therefore when you get a 29% selloff from the November highs in the Nasdaq, you will get a crash in the cryptocurrencies, which will likely spark the human behavior state of "panic," resulting in a "sell everything" mentality.
However, a few scenarios can likely play into gold and silver's benefit, with the first being a turnaround in China's lockdown policy that will take copper and silver higher. The second is that the Fed gets through with two more 50 bps rate hikes and then realizes the damage done to the stock market and pauses or pivots to a "dovish" stance that fuels gold's new rally. The third and least likely outcome is that the crypto people realize that what they are investing in is not what it is all cracked up to be and repatriate their hardworking capital into traditional safe-haven assets like gold and silver. Either way, I believe good things will come in the precious metals over the year. To learn more, we completed a new educational guide that answers all your questions on how to transfer your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.