Part 4 This is the fourth part of the macro analysis series. In this part we'll focus on analyzing the current situation of the commodities market based on fundamental and technical analysis, while trying to map out the future depending on how the Fed and the economy move. The key focus here will be on Oil, Natural Gas, Gold and Copper. You can find the rest of the analysis on the links down below.
The final component of our analysis will be some major commodities and more specifically Oil, Natural Gas, Copper and Gold. Oil and Natural gas have played a huge role in the inflation story as both of them have risen dramatically over the last 1-1.5 years. Oil and Natural gas are the largest component of determining energy prices, while energy prices are pretty much an input to every economic calculation. Therefore, the clearer the outlook on the energy sector, the clearer our outlook on inflation. At the moment Oil is in a very strong and clean bullish uptrend, with 100$+ oil in the next few months or years being possible. When it comes to oil, on the one hand demand is slightly below what it was in Jan 2020 and is expected to keep dropping, while on the other hand production is lower than what it was back then. Demand was actually pretty low for many years post GFC relative to what it was before the GFC, and the bad financial conditions indicate that we won’t have a major change there for the foreseeable future. In terms of supply, the 3 key components are 1. OPEC+ deciding to keep output low 2. Many producers going bankrupt in the bear market and especially in the April 2020 crash and banks not lending to oil producers, 3. Many oil wells haven’t been re-opened since that crash because it takes a while to do so, but also because of all the ESG mandates. Due to the ‘green movement’ there are less explorations, drills and overall operations of oil wells, something that isn’t going to change any time soon. Pretty much the same goes for Natural gas too, even though the situation there is a bit different, at least for Europe. In Europe its price went up 36x in just 18 months, as more and more people had been lured in the trap of low prices, thinking they will stay low forever. Well, let’s say that that was never the case, especially when Europe is getting most of its natural gas from Russia, a country with which it has had tensions historically. Won’t get into the politics as to what is going on Europe and Russia at the moment, but focus on the fact that higher energy prices have been a huge problem for the world and especially Europe, as they’ve destroyed a lot of wealth. Energy prices going higher, which seems to be the case based on the charts could inflict even more damage. On the bright side however both Oil and Natural gas might not be far off from putting a major top in.
Based on technical analysis, crude oil prices are overbought and are showing signs of divergence, while there is plenty of resistance in the 90-100$ range. Natural gas prices in Europe went parabolic in such a fashion, that it is hard to imagine the pressures will continue, especially as we are half way through the winter and demand for NatGas will go down… naturally. Everyone is slowly moving to other sources of energy, and this could be potentially why oil keeps going higher, while Natural gas both in the US & Europe got cheaper. The difference between NatGas prices in Europe and US is stark as European prices are insanely higher, so at the moment it looks like prices in the US could appreciate significantly, while in Europe they could chop for a bit and then start going down in the spring. To sum up the energy outlook, higher energy prices are actually likely in the short term, so they could push the Fed even more to raise rates, but in the medium to long term we could see Oil go back down to 50-60$ before it shoots up again.
Let’s now close with the major metals, Gold and Copper. Gold had started rallying since Sep 2018, when bond yields started coming down while the Fed was hiking rates. Then it kept rallying and in August 2020 in made new ATHs and broke the 2000$ mark. At that point everyone thought Gold would go to 3000-5000$ due to the Fed doing QE and keep interest rates low. Little did they know, as the Fed doesn’t print money and Gold was the biggest proof that the inflation in 2021 wasn’t really caused by fiscal or monetary policy. Some could say that gold had rallied enough, buy the rumor sell the news, the crypto stole its thunder and so on... and although these might have played a role, they still don’t explain how gold hasn’t really moved for more than a year. Now as real rates are going higher, Gold could go down significantly, something confirmed by technical analysis as it is looking pretty weak. It failed miserably to get back above its ATHs and that failed ATH breakout seems to have been a bull trap. On its chart vs the USD we can see 2 major areas with some double/triple/quadruple bottoms that are ready to be broken, as well as the 1300-1400 breakout zone that was never retested. At the moment it is still holding and there is hope for Gold, so maybe investors betting on a policy error is what could revive gold from here. Breaking and closing below the current diagonal support would be bearish, but closing below 1670 would be very bearish. Until it closes above 1940, we remain neutral/bearish.
Copper had a really huge rally from its March 2020 lows, one that was bigger than that of Gold, despite the fact that it took Copper about 9 extra months to break its ATHs. Some interesting facts are that Copper essentially had no pullbacks for months, but like Gold, once it broke above its ATHs it fell back down and chopping right below its ATHs. This could be yet another example as to how a drop in production, as well as increased demand due to Copper usage in the ‘green revolution’, were able to make Copper skyrocket. However, someone could attribute this and the rise of other commodities to speculation, in a similar fashion like in the aftermath of the GFC. We have a major shock; markets have a massive dump, the Fed starts talking about printing money, everyone panics and starts speculating on commodities, and all that while several producers have gone offline. Once the supply and demand imbalances start clearing out, once speculative money stops running in and the government/Fed stimulus runs out, markets roll over. Of course, back then China played a major role in the rise of some commodities, but now even them, the world’s largest producer seems to have slowed down. The second largest economy in the world is in big trouble, and there is no way this doesn’t affect the rest of the world heavily. Again, Copper has some interesting dynamics, and is also affected by ESG mandates, as the ‘green advocates’ are fighting against oil or copper producers because mining is damaging the environment, yet they actually need those things to build the tools to facilitate the green revolution.
When it comes to comparing Gold’s and Copper’s charts, it is clear that Copper looks a lot more bullish than Gold. Both of them are sitting below their 2011 ATHs, though Copper is sitting above its 2006-2008 highs and somebody could call its consolidation since May bullish. It does look a bit like a penant, so a close above 5% could send the price to 8-9$. However, in the case of major turbulence in the macro environment, it could dump and head down to 3-3.7$.
The final component of our analysis will be some major commodities and more specifically Oil, Natural Gas, Copper and Gold. Oil and Natural gas have played a huge role in the inflation story as both of them have risen dramatically over the last 1-1.5 years. Oil and Natural gas are the largest component of determining energy prices, while energy prices are pretty much an input to every economic calculation. Therefore, the clearer the outlook on the energy sector, the clearer our outlook on inflation. At the moment Oil is in a very strong and clean bullish uptrend, with 100$+ oil in the next few months or years being possible. When it comes to oil, on the one hand demand is slightly below what it was in Jan 2020 and is expected to keep dropping, while on the other hand production is lower than what it was back then. Demand was actually pretty low for many years post GFC relative to what it was before the GFC, and the bad financial conditions indicate that we won’t have a major change there for the foreseeable future. In terms of supply, the 3 key components are 1. OPEC+ deciding to keep output low 2. Many producers going bankrupt in the bear market and especially in the April 2020 crash and banks not lending to oil producers, 3. Many oil wells haven’t been re-opened since that crash because it takes a while to do so, but also because of all the ESG mandates. Due to the ‘green movement’ there are less explorations, drills and overall operations of oil wells, something that isn’t going to change any time soon. Pretty much the same goes for Natural gas too, even though the situation there is a bit different, at least for Europe. In Europe its price went up 36x in just 18 months, as more and more people had been lured in the trap of low prices, thinking they will stay low forever. Well, let’s say that that was never the case, especially when Europe is getting most of its natural gas from Russia, a country with which it has had tensions historically. Won’t get into the politics as to what is going on Europe and Russia at the moment, but focus on the fact that higher energy prices have been a huge problem for the world and especially Europe, as they’ve destroyed a lot of wealth. Energy prices going higher, which seems to be the case based on the charts could inflict even more damage. On the bright side however both Oil and Natural gas might not be far off from putting a major top in.
Based on technical analysis, crude oil prices are overbought and are showing signs of divergence, while there is plenty of resistance in the 90-100$ range. Natural gas prices in Europe went parabolic in such a fashion, that it is hard to imagine the pressures will continue, especially as we are half way through the winter and demand for NatGas will go down… naturally. Everyone is slowly moving to other sources of energy, and this could be potentially why oil keeps going higher, while Natural gas both in the US & Europe got cheaper. The difference between NatGas prices in Europe and US is stark as European prices are insanely higher, so at the moment it looks like prices in the US could appreciate significantly, while in Europe they could chop for a bit and then start going down in the spring. To sum up the energy outlook, higher energy prices are actually likely in the short term, so they could push the Fed even more to raise rates, but in the medium to long term we could see Oil go back down to 50-60$ before it shoots up again.
Let’s now close with the major metals, Gold and Copper. Gold had started rallying since Sep 2018, when bond yields started coming down while the Fed was hiking rates. Then it kept rallying and in August 2020 in made new ATHs and broke the 2000$ mark. At that point everyone thought Gold would go to 3000-5000$ due to the Fed doing QE and keep interest rates low. Little did they know, as the Fed doesn’t print money and Gold was the biggest proof that the inflation in 2021 wasn’t really caused by fiscal or monetary policy. Some could say that gold had rallied enough, buy the rumor sell the news, the crypto stole its thunder and so on... and although these might have played a role, they still don’t explain how gold hasn’t really moved for more than a year. Now as real rates are going higher, Gold could go down significantly, something confirmed by technical analysis as it is looking pretty weak. It failed miserably to get back above its ATHs and that failed ATH breakout seems to have been a bull trap. On its chart vs the USD we can see 2 major areas with some double/triple/quadruple bottoms that are ready to be broken, as well as the 1300-1400 breakout zone that was never retested. At the moment it is still holding and there is hope for Gold, so maybe investors betting on a policy error is what could revive gold from here. Breaking and closing below the current diagonal support would be bearish, but closing below 1670 would be very bearish. Until it closes above 1940, we remain neutral/bearish.
Copper had a really huge rally from its March 2020 lows, one that was bigger than that of Gold, despite the fact that it took Copper about 9 extra months to break its ATHs. Some interesting facts are that Copper essentially had no pullbacks for months, but like Gold, once it broke above its ATHs it fell back down and chopping right below its ATHs. This could be yet another example as to how a drop in production, as well as increased demand due to Copper usage in the ‘green revolution’, were able to make Copper skyrocket. However, someone could attribute this and the rise of other commodities to speculation, in a similar fashion like in the aftermath of the GFC. We have a major shock; markets have a massive dump, the Fed starts talking about printing money, everyone panics and starts speculating on commodities, and all that while several producers have gone offline. Once the supply and demand imbalances start clearing out, once speculative money stops running in and the government/Fed stimulus runs out, markets roll over. Of course, back then China played a major role in the rise of some commodities, but now even them, the world’s largest producer seems to have slowed down. The second largest economy in the world is in big trouble, and there is no way this doesn’t affect the rest of the world heavily. Again, Copper has some interesting dynamics, and is also affected by ESG mandates, as the ‘green advocates’ are fighting against oil or copper producers because mining is damaging the environment, yet they actually need those things to build the tools to facilitate the green revolution.
When it comes to comparing Gold’s and Copper’s charts, it is clear that Copper looks a lot more bullish than Gold. Both of them are sitting below their 2011 ATHs, though Copper is sitting above its 2006-2008 highs and somebody could call its consolidation since May bullish. It does look a bit like a penant, so a close above 5% could send the price to 8-9$. However, in the case of major turbulence in the macro environment, it could dump and head down to 3-3.7$.
Comment:
A little update (will do one for most parts).
Copper is looking pretty bullish and Gold is still above support. People mistakenly thought I was very bearish on Gold. It just happens that it stuck below major resistance and doesn't look as bullish as Copper. Copper has pretty different dynamics and demand, therefore one should expect it to perfect better in the current macro environment due to its demand in electronics, the green revolution and so on. On the other hand Gold is a store of value and has all sorts of competition and issues, like being mostly held by older generations, not useable on the internet and so on.
What I also mentioned in the comments is that if Gold closes above 1940 it would be very bullish. We saw gold bottom and slowly rise once the Central bank was cornered in Q3-Q4 2018. Despite the rate hikes it showed strength, which accelerated once the Fed restarted QE and cut rates due to the issues in the Repo markets. As the markets are already pricing in >3 rate hikes, the bottom for Gold might not be far, especially as the US dollar is showing weakness. The problem however is that the USD is showing weakness due to the fact that other Central banks are getting increasingly hawkish and are raising rates, something we hadn't really seen in the hiking cycle before Covid. Hence it is probably better to be patient or just buy a small amount of Gold, or even go long Copper than be in with full size.
Copper is looking pretty bullish and Gold is still above support. People mistakenly thought I was very bearish on Gold. It just happens that it stuck below major resistance and doesn't look as bullish as Copper. Copper has pretty different dynamics and demand, therefore one should expect it to perfect better in the current macro environment due to its demand in electronics, the green revolution and so on. On the other hand Gold is a store of value and has all sorts of competition and issues, like being mostly held by older generations, not useable on the internet and so on.
What I also mentioned in the comments is that if Gold closes above 1940 it would be very bullish. We saw gold bottom and slowly rise once the Central bank was cornered in Q3-Q4 2018. Despite the rate hikes it showed strength, which accelerated once the Fed restarted QE and cut rates due to the issues in the Repo markets. As the markets are already pricing in >3 rate hikes, the bottom for Gold might not be far, especially as the US dollar is showing weakness. The problem however is that the USD is showing weakness due to the fact that other Central banks are getting increasingly hawkish and are raising rates, something we hadn't really seen in the hiking cycle before Covid. Hence it is probably better to be patient or just buy a small amount of Gold, or even go long Copper than be in with full size.
Comment:
This will be our final update for all the ideas we've shared and from now on there will be single weekly reports that will touch briefly on each topic.
By looking at oil from another lens, that of Brent Crude and Gasoline, we can see that we've just had a major breakout. Hence despite the fact that we could have expected 92-93$ to be resistance, it looks like it will break easily. There is no doubt that oil's bear market is over, and that the capitulation we saw in April 2020 was one of the largest in history, if not the largest ever. Wiping out longs and oil producers, after 11 years of bear market, only to finish it off with major super powers fully controlling the supply with the help of ESG, is exactly what oil needed to skyrocket without any increase in demand.
By looking at oil from another lens, that of Brent Crude and Gasoline, we can see that we've just had a major breakout. Hence despite the fact that we could have expected 92-93$ to be resistance, it looks like it will break easily. There is no doubt that oil's bear market is over, and that the capitulation we saw in April 2020 was one of the largest in history, if not the largest ever. Wiping out longs and oil producers, after 11 years of bear market, only to finish it off with major super powers fully controlling the supply with the help of ESG, is exactly what oil needed to skyrocket without any increase in demand.
Comment:
Apologies for having to do a final comment, but our previous one was shared before finishing the update.
Like many of you have mentioned, a war between Russia and Ukraine could have major effects on Oil, yet just the tensions alone are enough to boost oil prices in this environment. Now if you were long up until now, taking some chips off the table isn't a bad idea, but be aware that the next major target for oil is 115-120 to sweep all the highs and then potentially have a correction down to 75$.
The truth is that the cure for higher prices, are higher prices... however the issue here is that we don't know how high oil prices can get. Will OPEC+ do something? Will the Fed raising rates change something? Will ESG mandates shifting change something? They are all possible. The problem though is that it is very hard for all the right conditions to occur when oil production at this stage is hard (less discoveries etc) and the incentives aren't really align for more output.
On the other hand the pressures on Natural gas seem to have subsided and we believe that in Europe things will improve, even though in the US we could see somewhat higher prices along with Oil. Natural gas in Europe might have one last move up and then slowly lower, while in the US we could see it go sideways for a bit and then start following oil.
On again thanks a lot of reading and we hope you found all this information useful. For more stay tuned for our next ideas. Good luck!
Like many of you have mentioned, a war between Russia and Ukraine could have major effects on Oil, yet just the tensions alone are enough to boost oil prices in this environment. Now if you were long up until now, taking some chips off the table isn't a bad idea, but be aware that the next major target for oil is 115-120 to sweep all the highs and then potentially have a correction down to 75$.
The truth is that the cure for higher prices, are higher prices... however the issue here is that we don't know how high oil prices can get. Will OPEC+ do something? Will the Fed raising rates change something? Will ESG mandates shifting change something? They are all possible. The problem though is that it is very hard for all the right conditions to occur when oil production at this stage is hard (less discoveries etc) and the incentives aren't really align for more output.
On the other hand the pressures on Natural gas seem to have subsided and we believe that in Europe things will improve, even though in the US we could see somewhat higher prices along with Oil. Natural gas in Europe might have one last move up and then slowly lower, while in the US we could see it go sideways for a bit and then start following oil.
On again thanks a lot of reading and we hope you found all this information useful. For more stay tuned for our next ideas. Good luck!
Comment:
Comment:
If you liked it remember the other parts too. This was the fourth part, so the first 3 can give you a much better idea about the macro enviornment.
Just a few minutes ago I added an idea on Bitcoin only and soon I will write an idea on the altcoin/crypto market in general. These two are the final parts. Once again thanks a lot for reading and I hope you enjoyed it.