What's Next for Commodities, Gold, & Silver?

07/17/2013 7:00 am EST

Focus: COMMODITIES

During recent weeks we have seen commodities, especially precious metals, continue to drop in value, writes Chris Vermeulen of TheGoldAndOilGuy.com, but there are signs that a bounce might be in the cards soon.

Market participant sentiment has become more bearish on commodities and couple that with a rising dollar 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 telling us that most of the market participants are feeling bullish on the stock market. This shift in sentiment of the masses are typical as they move their money from the risk on 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 also. Once this starts, money will naturally flow into safer assets that are more tangible like commodities.

Keep in mind 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.

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Chart Courtesy of StockCharts.com
Click to Enlarge

Now let’s fast forward to precious metals and what both gold and silver are likely to do in the next couple months. If you review the charts below, you will see gold and silver bullion prices are looking primed for a bounce/rally from these deep oversold levels.

Gold Weekly Price

chart
chart courtesy of StockCharts.com
Click to Enlarge

Silver Weekly Price

chart
chart courtesy of StockCharts.com
Click to Enlarge

Take a look at a basket of commodities through the GreenHaven Continuous Commodity Index Fund (GCC) exchange-traded fund.

GCC is an ETF 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 everyday 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 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 look ready to rally also like natural gas.

chart
chart courtesy of StockCharts.com
Click to Enlarge

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 is highly.

chart
Chart Courtesy of StockCharts.com
Click to Enlarge

Commodity Basket Trading Conclusion
In short, 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 like sugar, coffee, copper, and natural gas.

Last month, 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 these major market tops, which only happen every few years are a MAJOR PROCESS. They take time to form and often we will 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.

By Chris Vermeulen of TheGoldAndOilGuy.com

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