A tale of two metals, gold and copper

Six weeks have passed since the Feds hawkish shift at the June FOMC meeting that sent key metal prices spiralling lower. Copper has since recovered all of its lost ground and much more, while gold is trading -3.5% below its pre FOMC levels. In this article, we examine what comes next for gold and copper.

Gold 4

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. 

A tale of two metals gold 1

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.

A tale of two metals gold 2

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.

A tale of two metals copper 1

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

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