A tale of two metals gold and copper

A chart that has made a deep impression in recent days compares the impact of the sharp rise in new Covid cases and fatalities in the UK and Indonesia.

The UK saw new cases surge higher in July. However, hospitalisations and fatalities remained low because of a high vaccination rate of around 55%, which reduces the impact of the Delta variant.

In contrast, the surge in new Covid cases in Indonesia with a vaccine rate of just 6.5% caused fatalities to rise at an alarming rate. Given the need for a higher vaccination rate, September is now being touted as when lockdowns in Sydney will gradually come to an end.

In recognition of this, the economics team at Goldman Sachs have downgraded their Q3 GDP forecasts for the second time in two weeks and now expect to see Q3 Australian GDP contract by -1.4%q/q.  

However, the outlook is not all dire. This is an important consideration, especially for those trying to reconcile the deteriorating economic picture in Australia with the ASX200 trading at fresh all-time highs.

Vaccine supply is expected to ramp up in the coming weeks, a critical element in reaching the governments' vaccination targets to end this lockdown and prevent future lockdowns.

A second factor is increased fiscal support from the State and Federal Government, including the Disaster Payment of $600 per week for those who cannot work due to mobility restrictions.

Finally, household balance sheets are in a strong position. Saving levels are high, and the strong housing market is providing comfort. All of which points to a sharp snapback in economic activity in Q4.

Technically, the ASX200 is at an interesting juncture showing some preliminary rejection of trend channel resistance at 7420 on bearish RSI divergence.

While below trend channel resistance the preference is for further range trading including a retest of the bottom of the range at 7200. Aware that a sustained break above 7420/40ish is needed to indicate that the next impulsive leg higher is underway.

Source Tradingview. The figures stated areas of the 26th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Gold

The Federal Reserve's hawkish pivot at the June FOMC meeting sent gold sharply lower from above $1850 to a low of $1751. The sell-off, a function of gold's negative correlation with rising US real yields/interest rates and a stronger US dollar.

Since then, the US dollar has failed to break higher and is showing signs of upside fatigue. As viewed on the chart below, US 5 year real yields have fallen back to record lows, leaving gold trading exceptionally cheap on this metric. 

However, investor's attitudes towards gold remain cautious, as witnessed by golds close back below $1800 overnight. Likely reflecting an expectation that real yields will push higher as the labour market improves in September after unemployment benefits expire nationally.

Technically while gold remains above trendline support at $1750, we will give the uptrend in gold the benefit of the doubt, needing a rally above $1834 to suggest a more robust recovery towards $1900 can unfold. Aware that should gold first slip below support at $1750ish, a deeper sell-off towards $1600 is likely.

Copper

The recent slowdown in China has been a headwind to copper, offset by strong demand from the rest of the world, moving further along the clean energy investment cycle.

An example of this, three times as much copper is used in electric vehicles than conventional internal combustion engines. However new copper supply has stagnated since 2016, leaving the market structurally undersupplied.  

This dynamic is behind the sharp move higher in copper this week, in line with expectations, we wrote about here two weeks ago. Thereby providing an excellent example of a trade idea supported by bullish fundamentals and technical' s.

However, it is not over yet, and providing copper does not retrace back below support at $4.40ish, the expectation is for a test and break of the May $4.88 high.

Source Tradingview. The figures stated areas of the 27th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation