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Will Copper And Crude-Oil Rally Drive Silver?

Published 11/13/2017, 11:37 AM
Updated 05/14/2017, 06:45 AM

While it is widely believed that commodities are one of the few "undervalued" sectors, sustained rallies have been hard to find over the past few years. Could all that be finally beginning to change?

The key to any commodity rally is weakness in the US dollar. Most commodities trade in dollar terms so a rising dollar generally puts pressure on the sector. In contrast, a falling dollar is usually good for the sector. As you can see in the chart below, the general trend since 2015 has been a flat-to-falling US dollar as measures by the Dollar Index:

Weekly USD

It could be argued that the two most globally-important commodities are weekly copper and crude oil. Let's start with copper where, for the past year or so, we've been following a growing bottom and breakout on the chart. Does this look to you like a bear market or a reversal and switch to a new bull market, instead?

Weekly Copper

And now look at WTI crude oil. Note the similar chart pattern to copper. Could a move into the $60s be construed as a breakout and renewed bull market after a three-year bottoming process?

Weekly Crude Oil

With dynamic rallies already underway in other commodities such as zinc and palladium, the question becomes...Are we in the early stages of a renewed bull market for commodities, in general? On the chart below of the the Continuous Commodity Index (NYSE:GCC), you can see the possible beginnings of a turnaround.

WisdomTree Continuous Commodity

What might this mean for silver, which despite its long history as a monetary metal, is now currently perceived primarily as an industrial metal and considered a "commodity"? If we view Comex silver through the same five-year lens, we note a reverse head-and-shoulder bottom, similar to those seen on the charts of copper and crude. However, we also note that unlike copper and crude, silver has yet to begin a rally of any consequence.

Weekly Silver

What to make of all this? Actually, it seems rather simple. Should the commodity rally continue, it will begin to take on a life of its own, with global money managers and asset allocators recognizing the new bull market and creating a virtuous cycle of higher prices through their inflows of cash to the "undervalued" sector. In this case, copper will move higher and toward $4.00 while crude oil breaks through $60 and heads toward $80.

If this happens, we could imply a price of silver that easily reaches the mid-to-upper $20s sometime in 2018. Is this possible or would/will The Banks be able to keep their collective thumbs on the price? Your answer to that question will depend upon the size and scale of the cash flow into the sector.

So again, it may be rather simple. Resolution of this will be a function of the dollar, copper and crude. Forecast those three for 2018 and you'll likely be able to correctly forecast the price of silver, too.

Latest comments

Why would banks want to limit the price of silver, or gold for that matter? That's one of the common "conspiracy theories" that gets tossed about in chats whenever there's a perceived feel that banks are attempting to cap a price increase in precious metals, but why are high PM prices bad for banks?
Give it up Sergio. If gold was so great the banks would be buying it nonstop.
 Give what up? I'm asking a question because I'm trying to understand. It looks from your comment like you don't understand either.
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