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COMMODITY FUTURES FORECAST
WEEKLY REPORT
Prepared by
Commodity Futures Forecast
Gold And Silver Surprise
Contrarians gloated this week as the seemingly moribund gold and silver markets sprung to life. While no one was watching, London silver stocks were drawn down while contracts were accumulated. Suddenly, the London Metals Exchange warehouse needed silver and the squeeze is on. Technically, silver broke through resistance and is revived for the bulls. However, there are no clear fundamentals that would support such a dramatic and quick recovery.
While some traders point to a gold/oil relationship, there is little evidence of a run away energy market. Most weather reports call for a mild winter based upon previous patterns observed when El Nino is in effect. Of course, objective evaluation may clash with subjective interpretation because of recent chills in the upper Midwest and Northeast. From a personal observation, people may conclude winter is coming early. From a more logical standpoint, there is merit in the argument that the severity of the winter is secondary to its length. Regardless of a 32 degree temperature versus —10, the heat must be turned on.
I have been part of the bearish consensus and was stopped out of shorts in silver and gold. With strong technical buy signals initiated this week, there is a classic clash against fundamental perspectives. Which should we select?
For strict technicians, there is no choice but long. Any fundamental information should be discounted because it is probably inaccurate. Something has gripped silver and gold and the best strategy is to “go with the flow.” Perhaps there is an underlying fear that equities are reaching a top. Major stock indices have not been able to forge ahead to new high ground and we are approaching the feared “fall phenomenon.” The two most memorable crashed came in October. Could the bounce in silver and gold be a hedge against this possibility?
If we move into a long position, my inclination is to use reversal stops. I don't often put these in place because there is a tendency to get whipped in two direction when inter-session volatility increases. On the other hand, I have seen these types of rallies evaporate very rapidly when fundamentals cannot support a technical breakout. Depending upon today's session, there is also a possibility of an option combination that avoids some of the exposure.
Right now, there is no indication of an inflation or confidence crisis. It is important to note that gold and silver do not necessary contra- trend stocks if there is a crash. Generally, a crash creates a liquidity crisis and all investments fall victim to the need for cash. In 1987, investors were forced to dump silver and gold to maintain liquidity.
Finally, we should not discount the possibility that central banks may take advantage of this price event. A few extra dollars can't hurt. Indeed, if Australia is a model, we could see central bank liquidations. In addition, silver prices above $5 are going to be hard to resist for producers who have suffered so long with sub-$5 levels. In particular, copper prices have weakened because production has finally tipped scales. Some analysts believe considerable byproduct silver, gold, and other precious metals are in storage...waiting to be dumped.
Regardless of the viewpoint, it is refreshing to see renewed interest in precious metals after such a long dry spell. While there is plenty of downside potential, the public is drawn to a bull market. This is the medicine precious metals need. I hope the interest lasts.
Cattle And Hog Assessment On Track...For Now
We sold February cattle and December hogs in anticipation of further price deterioration. So far, our analysis has been justified despite a slow start for both positions. Technically, it appeared February live cattle would challenge triple support at 7000 that was established in February, April, and June '97. Subscribers should recall that I touched upon the inventory build-up in August and began taking a short-side perspective. I viewed 7150 as interim support which, indeed, held. But, the penetration of this support was a sign of fundamental weakness because deliveries would be forced as the herds reached their weights.
The relatively mild summer did not stress animals and my information revealed good weight gains in most producing states. Bingo!...The USDA weekly meat reports have confirmed weights are up. Don't forget that futures are in pounds, not numbers of animals. Heavy placements are a further indication of the fall season glut that will carry towards the February delivery.
Strategically, we have an indication of an “oversold” condition that could pop prices higher. The key will be whether resistance can be established at or near 7000. If so, I would not be surprised to see a flag form between 6900 and 7000 to mark 50% of a move down to 6750. Thereafter, I would set a final objective above 6500 and look for a strong corrective rally back to 6750/6850.
The hog chart is a step ladder mess with a continuing downside bias. Some traders questioned my sell strategy with hogs “so low.” The fundamentals suggest we may be approaching a bottom around the 6300 to 6100 area. Caution is in order because we are dealing with lean hogs that sell at a premium over the old live hog contract. Prices at 6300 in this contract are similar to low 50's for the old contract. This is not to say prices can't go lower, it is simply a hint that we want to tighten up our protection.
I am holding to the possibility 6000 support will be violated. This provides two important elements. First, we gain more downside profit. Second, it sets up an eventual bull market reaction when cheap inventories are liquidated. While many analysts believe deferred contracts will come under more selling pressure, I feel support may come in time to help the June and July pork complex deliveries. In the meantime, we have finally made progress in our belly/hog spread taken with hogs almost at a premium to bellies. Time will tell.
October 2, 1997 Philip Gotthelf
Commodity Futures Forecast
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Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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