RISING STOCK MARKET IS BAD FOR GOLD -- COPPER LOOKS LIKE A BETTER ALTERNATIVE -- GLOBAL X COPPER MINERS ETF HITS FIVE-MONTH HIGH -- FREEPORT MCMORAN FLATTENS OUT -- SOUTHERN COPPER BREAKS NECKLINE RESISTANCE -- HUDBAY MINERALS ALSO TURNS UP
RISING STOCKS ARE BAD FOR GOLD... During last Saturday's webinar, one of the attendees asked what I thought of gold. I responded that I didn't like gold and haven't liked it for at least two years. The main reason for that view is the strong stock market. Most people are aware of the generally inverse relationship between gold and the dollar. The rising dollar over the last year has certainly been negative for gold -- as it has for all commodities. But gold is also hurt by a rising stock market. I suggested that a new high by stocks (which I thought likely) would be negative for gold (even with the dollar in a downside correction). That view proved correct this week. The orange bars in Chart 1 show gold falling sharply at week's end as the S&P 500 (black line) hit a new closing high. Gold is viewed as an alternative to stocks. It usually does better when stocks are weak, and worse when stocks are strong. Gold prospered between 2000 and 2011 during the "lost decade" in stocks that included two major bear markets. Gold peaked when stocks started a new secular uptrend. The weekly bars in Chart 2 compare the two. It shows gold peaking in 2011 as the S&P 500 recovered from a near 20% correction. The two asset classes have been trending in opposite directions since then. The S&P 500 exceeded its 2000 and 2007 peaks in the spring of 2013 to signal a new secular bull market (see circle). In my view, that helped start a bear market in gold. That helps explain why gold has remained one of the weakest commodities, and hasn't benefited from the recent pullback in the dollar. But there's another metal that has recovered.
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Chart 1
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Chart 2
COPPER IS STARTING TO RALLY... The second part of my response to the question on gold last Saturday was that an investor looking to invest in a metal would probably do better with copper or a copper stock. While oil has been the strongest commodity over the past couple of months, copper has been the second strongest. The daily bars in Chart 3 show the price of copper (the red metal) establishing a pattern of rising peaks and troughs since late January. It rallied on Friday along with the stock market. Because copper is an industrial metal, and rises and falls with the global economy, it has a much stronger link to stocks. So while a rising stock market (and a stronger global economy) hurt gold, they usually help copper and stocks tied to that commodity. Copper also bounced off a rising 50-day average (blue) line, but needs to clear its 200-day average (red line) to signal a more significant upturn. Stocks tied to copper were one of the past week's strongest performers.
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Chart 3
GLOBAL X COPPERS MINERS ETF HITS NEW 2015 HIGH... The daily bars in Chart 4 show the Global X Copper Miners ETF (COPX) rising to the highest level since last December (on rising volume). Its relative strength ratio (red line) has risen sharply since mid-March as well. Copper stocks were one of the week's strongest groups. The COPX gained 5.4% this past week versus a 1.7% gain in the S&P 500. That outpaced energy stocks (0.09%) which had been leading the recent bounce in commodity stocks. Gold stocks lost nearly -2%. The COPX is a basket of global copper producers.
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Chart 4
FREEPORT MCMORAN MAY BE BOTTOMING... One of the copper stocks that always come to mind is Freeport-McMoran (FCX) which is the biggest copper producer in the U.S. Chart 5 shows the stock moving sideways over the last two months. It has, however, exceeded its 50-day line and may be nearing a test of its late February high. Its relative strength ratio (red line) has been moving up as well. It still has a way to go to even reach its 200-day moving average (red line), but it may be in the early stages of bottoming. There's a second copper stock that has a much stronger pattern.
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Chart 5
SOUTHERN COPPER BREAKS NECKLINE RESISTANCE... The daily bars in Chart 6 show Southern Copper (SCCO) surging more than 2% on Friday (on rising volume). It so doing, it cleared a "neckline" drawn over its November, February, March highs. It's also trading above its 200-day average. The chart looks promising. Its next hurdles to overcome are its February intra-day high at 30.95 and its November high at 31.68. [SCCO is one of the biggest holdings in the COPX].
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Chart 6
HUDBAY MINERALS ALSO LOOKS STRONG ... A number of Canadian copper stocks showed up on the Toronto leader board on Friday. One of them was HudBay Minerals (HBM.TO). The stock also trades on the New York Stock Exchange under the symbol HBM. I'm going to start with how its looks on the Toronto exchange. And it looks good. The weekly bars show the copper stock closing at a new eight-month high and approaching a test of major overhead resistance near 12. To me, the chart has the look of major basing pattern that's been forming since the start of 2012. That would make a decisive close over 12 a major bullish breakout for the stock. It would also have bullish implications for the entire copper group and, possibly even, the price of copper itself. [The Canadian stock is the second biggest holding in the COPX]. Chart 8 shows how the stock looks on the NYSE. Even though it also scored an upside breakout on Friday, it's further away from its summer high at 10.95. That's because the HBM traded in New York is quoted in U.S. dollars which have been much stronger than the Canadian currency over the last five years. That's also why the same stock traded in Canadian Dollars in Toronto looks relatively stronger.
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Chart 7
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Chart 8
COPPER BOUNCES OFF MAJOR SUPPORT LINE... I recently showed an oversold CRB Index bounceing off major chart support formed during 2009. The monthly bars in Chart 9 show copper well above its 2009 low, and bouncing off a major support line drawn under its 2002, 2008 lows. That's makes it much stronger than commodities as a group, and puts it at a logical spot to attempt a bottom. That's another reason to keep a close eye on the industrial metal. It's looking more and more like crude oil has bottomed. Copper may be the next commodity to do the same. It's normally a good sign when stocks lead the commodity higher. That's what energy shares did during the first quarter. Stronger copper shares may be doing the same for copper. Since February 1, the COPX has gained 24% versus a nearly 10% gain for copper. That's a good sign for the commodity.
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Chart 9
DOLLAR INDEX SLIPS BELOW 50-DAY AVERAGE ... I recently warned that the U.S. Dollar Index was starting to look toppy. Not necessarily a major top, but the start of a much-needed correction. The daily bars in Chart 10 show the PowerShares US Dollar Bullish Fund (UUP) ending the week below its 50-day average (blue line). That's the first close below that support line since its rally started last July. Dollar strength has been one of the main depressants on commodity prices. That being the case, any downside move from here should provide some much-needed commodity support. The weaker dollar appears to be helping copper and oil. But not gold. The bullish impact of a falling dollar on bullion is being offset by higher stock prices. The weaker dollar is also giving a boost to foreign stock ETFs that are quoted in dollars. My Thursday message showed it having a bullish impact on Canadian iShares. Basic materials are a big part of the improving Canadian market. And that includes copper stocks. And finally, the weaker dollar since March may explain why large caps in the states are starting to do a bit better than small caps. Large multinationals that do a lot of foreign business usually benefit the most from a weaker currency.
