During the recent weeks, we have seen commodities -- and especially precious metals -- continue to drop in value. Market participant sentiment has become more bearish on commodities. Couple that with a rising dollar, and it’s no wonder why we continue to see commodities as a whole fall in value.
Money has been flowing out of bonds at record levels this summer, which tells us that most market participants are feeling bullish on the stock market. This shift in sentiment from the masses is typical as they move their money from safer assets (bonds and commodities) and rotate into risk-on assets like stocks. While this is a bearish (contrarian) sign, stocks could easily continue to rally for an extended period of time, and possibly several more months, before they actually top out.
Let’s take a look at the financial market business cycle diagram.
Bond prices have been falling for months and they typically lead the stock market lower. I feel we are starting to enter the phase where stocks will soon top and head lower as well. Once this starts, money will naturally flow into safer assets that are more tangible, such as commodities.
Keep in mind that this cycle is very slow-moving, and rotation from one phase to another takes months. This is a process, not an event, but it is still very tradable.
Now let’s fast-forward to precious metals, and take a look at what gold and silver are likely to do in the next couple months. If you review the charts below, you will see that gold and silver bullion prices are looking primed for a bounce/rally from these deep oversold levels.
Gold Weekly Price
Silver Weekly Price
Take a look at a basket of commodities through the GREENHAVEN Continuous Commodity Index Fund
(NYSEARCA:GCC), which is an exchange-traded fund that provides an innovative and efficient way to deliver broad-based, diversified commodity exposure. It aims to achieve this by using futures contracts to track the Thomson Reuters Equal Weight Continuous Commodity Total Return Index (CCI). The CCI-TR is an equal-weighted index of 17 commodities plus an additional Treasury bill yield. Because of the equal weighting, GCC offers significant exposure to grains, livestock, and soft commodities and a lower energy weighting than many of its peers. In addition, GCC is rebalanced every day in order to maintain each commodity’s weight as close to 1/17th of the total as possible.
So knowing metals are 24% of the index, it bodes well for a bounce in the overall commodity index. Keep in mind this report is only focusing on precious metals, but many other commodities, such as natural gas, also look ready to rally.
GCC - Continuous Commodity Index Fund Weekly Trading Chart
The chart below shows a very bullish four-year chart pattern. At the very minimum, a bounce to the $29 level is highly likely.
Commodities as a whole remain in a down trend. Until they show signs of real strength, I will not be trying to pick a bottom. Several commodities are starting to look oversold and ready for a bounce, including sugar, coffee, copper, and natural gas.
I talked about how a major market top is likely to unfold during the second half of this year. I still believe this to be true. But keep in mind that the formation of these major market tops, which only happen every few years, is a major process
. They take time to form. We will often see a series of new highs followed by quick sell-offs as the market gets more people long as the big money distributes their shares/contracts into the new money rotating into the market.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
No positions in stocks mentioned.
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