I recently posted a chart detailing the performance of the S&P 500 versus the Goldman Sachs Commodity Index showing the vast underperformance of the commodity sector against equities in general. My conclusion, based on that chart, was that global growth was mediocre at best and that stock market strength is more a function of Yield Chasing by speculative forces in a near Zero interest rate environment rather than evidence of a robust growing economy.
The shift in speculators, especially the large hedge funds, into playing copper from the short side, confirms that view in my own mind.
Notice earlier this year how upbeat the hedge funds were on the future prospects of copper. July of this year saw them very optimistic. Here we are a mere two months later and they have completely reversed sides and have moved to a net bearish position. That dichotomy between the "other large reportables" category and themselves has evaporated ( although the former category is in the process of covering existing short positions ).
What to make of this?
Take a look at the copper chart and tell me what you see here.
Does this chart even remotely resemble one that is the least bit bullish? Of course it does not. Copper is continuing in its now 3 1/2 year old bear market.
Highs are progressively lower and lows are getting lower. What this tells us is that global demand for copper is not keeping pace with the increases in supply. Another way of saying that, is global growth is not strong enough to generate sufficient demand for the red metal that will allow it to eat through the available supply.
That is hardly the thing out of which strong, runaway inflation pressures are born.
By the way, here is an updated chart of the overall commodity sector as of the close of trading this week. Again, I am using the Goldman Sachs Commodity Index or GSCI.
The sector notched a 27 month low this week.
I have commented in the past that silver and copper tend to move in rather close sync.
Here is a chart of silver.
As you can see, the chart pattern is very similar to both the copper chart and the overall commodity sector, although silver has been bouncing around going nowhere for the last year.
What explains this lack of performance to the upside? Answer ' "Price manipulation" will scream the usual culprits. "The powers that be are actively working to manipulate the silver price lower!", they will breathlessly assert.
That is not the case however. Look at what the hedge funds are doing in there. They are abandoning the long side and beginning to move more towards the short side of this market as well, just like they have done with copper., and I might also add, a host of other individual commodity futures markets. I would guess, because this COT data only covers through Tuesday of this week and did not catch the fall through support near $18.60, that the hedge funds may now, as of this Friday, be net short in the market.
For silver to turn around sharply, there will need to be some sort of catalyst in the form of a shift towards strong global growth, strong enough to generate inflation concerns and cause an inrush of money flows into the broader commodity sector. For the time being, that does not look to be on the radar screen.
How it handles this level near $18.60 will be critical. If it can hold near here, it will have a chance to reverse course and move back to try for a test of $20. Above that $21.50 stands as a huge hurdle to any further upside progress. At this point, the trend in silver is sideways to lower and unless we see something change on this chart, that is the way it looks as if it will continue.
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