Gold and Silver Find New Highs as Copper Joins the Reflation Trade

Metals are ascendant as central banks in the U.S. and China cut interest rates

• Metals are surging in recent days, thanks to the Federal Reserve and People’s Bank of China loosening monetary policy significantly.  

• Year-to-date, gold prices (/GCZ4) are having their best performance through this point in September in the 21st century. 

• Copper prices (/HGZ4) have nearly doubled their YTD gains in the past week. 

Market Update: Gold prices up 6.62% month-to-date 

It’s been a month since we last wrote a note about metals and how the world has changed. We’ve seen dramatic shifts in the U.S. presidential race, the Federal Reserve’s 50-basis-point (bps) cut in interest rates and China’s wall of fiscal and monetary stimulus. All of these have proven bullish for metals, especially over the past two weeks. 

Not that higher prices for precious metals are necessarily a surprise. A month ago, it was observed that “it may be difficult to envision further gains from here; and yet, the fundamental and technical backdrops suggest just that … technically speaking, it’s difficult to justify fading metals when they’re exhibiting increased bullish momentum.” The question now is whether metals still have the strong fundamental and technical backdrops that justify retaining a bullish perspective.

The answer is yes. The reflation trade is afoot, thanks to the efforts of the Fed and the People’s Bank of China (PBOCZ). Globally, liquidity conditions have begun to improve as a weaker U.S. dollar alongside the bevy of rate cuts has dramatically reduced funding stresses worldwide. The rise in U.S. long-end bonds’ nominal yields reflects higher growth and inflation expectations; ultimately, real yields have been on a downward trend and a series of Fed rate cuts keeps the winds pointing in that direction. Until momentum breaks, there’s no justifiable reason to call the top in any of gold, silver or copper. 

/GC Gold Price Technical Analysis: Daily Chart (January to September 2024) 

Gold prices (/GCZ4) have set all-time highs five consecutive sessions, continuing their breakout toward the 100% Fibonacci extension target of 2723.10. Bullion continues to trade above exponential moving averages for the daily five-EMA, daily 21-EMA, and daily 34-EMA. The EMAs are in bullish sequential order. Slow stochastics are holding in overbought condition, while the moving average convergence/divergence (MACD) continues to trend higher above its signal line. Given the volatility profile (IVR: 76.3), selling put spreads is the prudent way to express a bullish bias in the short-term (for the more aggressive, paying up for at-the-money (ATM) or slightly out-of-the-money (OTM) call spreads has been working as well). 

/SI Silver Price Technical Analysis: Daily Chart (September 2023 to September 2024) 

Silver prices (/SIZ4) have seen their posture improve meaningfully over the past month. /SIZ4 is  now back above their daily 5-, 21- and 34-EMAs, and the EMA cloud is in bullish sequential order. Slow stochastics are holding in overbought condition while MACD is trending higher through its signal line. Volatility remains elevated (IVR: 82), which favors selling put spreads as opposed to buying call spreads to express a bullish bias. Longer-term charts would suggest this recent leg higher is just the start of a more aggressive topside move in the coming months. 

/HG Copper Price Technical Analysis: Daily Chart (January to September 2024) 

Copper prices (/HGZ4) have exploded higher in recent days, effectively doubling their year-to-date (YTD) gains over the past two weeks. In doing so, /HGZ4 has traded to its July swing higher, where a breather in the rally may transpire. Nevertheless, picking tops or bottom is a fool’s errand (even if this trader tries it now and again foolishly), and the consistent momentum profile – as strong as its metallic brethren – warrants little more than looking for opportunities for long delta exposure. Volatility is exceptionally high (IVR: 100), which makes /HGZ4 perhaps the most intriguing and actionable of the three major futures metals. 

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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