The Metals Maze

Intermarket relationships between metals can not only give cues about the economic cycle but also lead the start of a global equity bear market.
The last time we discussed Gold in Dec 07, it was at dollar 800. Starting 2008 it completed it’s leg up to 1000 and is now ruling at 930. While Gold and Silver might be hanging in there tight, metals as a group are scattered on the price performance scale.
For example few would like to talk about Zinc, which has crashed 50% since the time we wrote about negativity on Zinc (Jan 2007 – India Outlook). It was then we saw that the metal had turned and Hindustan Zinc could fall despite a positive Sensex. The love has turned into hate. And all the merger talks between Zinifex and Umicore could not prevent Zinifex from crashing 61% from merger highs. Euphoria about mergers, despite a 33% success rate (since 1985) is unsustainable.
Even Uranium fell 50% from its peak. There are of course many reasons why metals or markets fall or why things happen. But most reasons, like news always are late and cannot time a market. The reasons which worked for Zinc were linked to fractals of mass psychology and intermarket analysis.
We made the case between equity (example Hindustan Zinc) and its underlying metal and how one could tell us about the other. Today we go a step further and look at the relationships between metals itself. We extend the inter market  dynamics to  various metals like Gold, Silver, Zinc, Copper and Uranium.
Silver has never outperformed Gold since 1985. And Gold-Silver sentiment indicator, which we have mentioned on prior occasions continues to be leading market indicator for equity bear markets.
The last two periods when Gold outperformed Silver was in 1987-1991 and 1999 -2003. Both these periods were the only time we witnessed the last two global bear markets. Gold has not started outperforming silver yet and is still at parity of about 25 years.
So there is no negative signal here. This means that all references to great depression and pictures of pensive Ben Bernanke on the Newsweek cover alluding to a global crisis and failure of American Leadership might all be premature. According to metals, this was no big collapse. We need another few months to see what works, the news and emotional chaos or the Gold – Silver ratio.
Then comes Copper-Silver ratio. Copper is outperforming Silver from Jan 2002. Why should Copper outperform Silver? Copper is more about discretionary consumption and Silver is precious and limited in its industrial usage.
This is probably the reason why Copper leads Silver consumption at the start of a business cycle. The ratio made a low few months ahead of the equity bear market low worldwide in 2002.
The ratio has stagnated over the last two years but is still above parity. Copper prices also are in a large consolidation and seem to have a primary (more than 9 months) upside left. This means more outperformance for copper compared to Silver. This too does not give us bearish cue for equity markets now.
Coming to Uranium, this strategic metal has also outperformed Gold. Compared to the geopolitical crisis and the dollar crisis that is crippling the world economy, it’s the energy crisis which Uranium suggests is more serious.
This metal leadership starting Feb 2005 happened exactly at the time when Oil  broke above the dollar 40 barrier broke. We have also illustrated the Uranium – Oil intermarket ratio. The outperformance of Uranium compared to Oil also suggested that Oil was set to rise much above dollar 40. Strange reason some might say, a metal telling us more about global economy than the best economists in the world.
This list of intermarket dynamics between metals can be stretched to Uranium vs. Copper. Copper is linked to mid economic expansion cycle, while Uranium owing to its energy connection comes in the late expansion economic cycle. Uranium started outperforming Copper in (late) 2005 and is still above parity suggesting that we are nearing towards the turn in the economic cycle. Here also we have no signal which tells us, that we have indeed turned.
Zinc has come a full circle compared to Gold. It outperformed Gold from Sep 2005 and now starting this year started underperforming Gold. Why?
Zinc is linked with auto and auto is in a rut. The commodity drop might be owing to this auto connection. Zinc is also ancillary to the metal industry. A drawdown in metal prices might also have some added influence.
From a fractal perspective, both Gold and Silver are completing their primary fifth circle legs with a final pending leg up. Final leg ups are tricky and can be truncated. So we will not be micro timing it. After these respective final legs, both precious metals should see a sizeable retracement.
Locally (India)INR 12,000 levels are decisive for MCX Gold Jun. A push down here confirms further negativity here. MCX Silver Jun key levels lie at INR 24,000. And we have not much positive confirmation here too.
In conclusion, we are indeed at key junctures for Gold and Silver and global markets. But in any case, it’s not the metals that are insane, but we the humans.
In his book, The power of Gold, Peter Bernstein starts with a story of a man on a voyage with his entire wealth in a large bag of gold coins. A terrible storm and a call to abandon the ship prompted the man to jump overboard strapped to his bag of gold. He promptly sank to the bottom of the sea. And so the narrator asks, “Now, as he was sinking, had he the gold? Or had the gold him?“