Commodities outlook: Strange behaviour on metals markets

by Rajan Dhall from interactive investor |

While equity markets tumble, there are equally strong influences on metal prices right now. 

The commodities markets are in a strange sort of limbo every time China is off for Golden week. The world’s largest consumer of base metals will begin trading again next Tuesday, and boy have they missed a lot. 

Equities markets are falling dramatically after US ISM manufacturing PMI's hit their lowest levels in 10 years. This reading also marked the second month in a row of contraction and, to add to that, the new export orders index tanked to only 41%, the lowest level since March 2009. 

The S&P 500, Nikkei, FTSE 100 and ASX all fell over 1.50% yesterday, and it is clear that markets are looking for some kind of reaction from the Federal Reserve at their meeting this month. 

Interestingly, commodities reacted in a strange way. The strong US dollar has been a problem for some time and, as the data came in weak the dollar pulled back. This led to a cap on the amount that copper fell. 

Most copper traders had already been pricing in the fact that manufacturing data is weak and the numbers from China are more important anyway. This does not mean that the US and German numbers are insignificant, just that the strong dollar was more of a factor at that precise moment in time. 

Now that moment has passed it seems we are back to a weaker copper price again. Looking at the technical picture, we still have a weak chart even though the recent lows were rejected. The relative strength index (RSI) indicator is below 50 again and the bearish channel is still intact.  

Looking ahead, we have the next round of trade talks on the 10-11th October, and Trump needs a win. Might he blame the bearishness in stocks on the Democrats impeachment bid, throw out some positive trade headlines and praise himself that stocks have risen? 

Source: TradingView Past performance is not a guide to future performance

Gold is in a strange situation. The market clearly doesn't want a stronger gold price at the moment, but the geopolitical issues will just not pass. The $1,565.5 per ounce level was rejected in a period in which the gold price should have broken higher due to the aforementioned geopolitical factors.

Hong Kong, Brexit, Trump impeachment and a possible middle east conflict are some of the key reasons the market should be placing itself inline with safe-haven assets. There is a strong feeling in markets that the Fed is the next major news story.

The chart below is the daily gold futures chart. It is clearly in an uptrend at the moment, but the most recent price waves made a lower high and lower low formation. This now makes $1,469 per ounce a very important level. If the price breaks below that, we could be in for a bearish correction, but the most likely scenario is a consolidation at the value area price until we hear more from the Fed. 

Source: TradingView Past performance is not a guide to future performance

The relative strength index (RSI) indicator is showing a bullish signal called a "failure swing". This is when the price is in an uptrend, but the indicator makes a bearish wave. The signal works often but should not be taken as gospel as it should line up with other fundamental factors. 

Looking into next week, if the equities sell-off continues, then the $1,565 per ounce level will become key, but if the dollar strength is persistence, the gold price could continue to consolidate. 

Rajan Dhall is a freelance contributor and not a direct employee of interactive investor.

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