Breakout

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Gold to $1,300 and 3 Other Commodity Shockers

Breakout

Along with stock markets around the world, commodities have been beaten up over the last few months. Since hitting 370 at the end of April the CRB Index, a broad measure of commodity prices, fell to just under 300 at the end of September; a 19% drop more or less in line with that of the stock indexes.

The time-honored Wall Street tradition is to note this decline then try to ascribe causation. "Commodities are suffering as a function of faltering global growth demands" or "commodities are falling because the dollar has gotten stronger," for instance. Neither of these answers are actually correct in any verifiable way but the process of analysis and the ensuing debates seem generally useful, at least to those inclined to fundamental analysis.

In contrast, technical strategists (read: chart guys) like Rich Ross of Auerbach Grayson, try to avoid this rhetoric and focus on patterns. To them the process is about studying where prices have been and using the information to formulate best guesses about where prices may go. The methods used for creating target levels have varying complexity but the basic idea is the same: graph prices, find trends, check history, make forecast.

Ross has done the wet-work of compiling all the technical research and target prices for us. Here's what he came up with:

Commodity and Currency Predictions

Strong Dollar/Weak Prices: These are the peas and carrots of commodity pricing. A strong dollar wants, almost needs, weak commodity prices for the world to make sense. Despite occasional divergences, Ross notes that "overwhelmingly you've seen strong correlation between a stronger dollar and a weaker everything else." We've got that relationship working now, meaning a Ross strong-dollar call implies weaker commodities going forward.

Brent vs. WTI Crude: Brent is taken from overseas and refined relatively cheaply. West Texas Intermediate (WTI) is created and refined at a generally higher cost in the U.S. Brent and WTI are supposed to trade in lockstep, a relationship which has been flagging lately. Ross says to pay more attention to Brent, as opposed to the WTI quote dominating the headlines. WTI is "noisy" for a ton of fairly wonky, but real reasons. Brent is the real proxy for growth and the level to watch is $100. Below there and the crude downtrend is in full effect.

Gold: "Gold needs to be sold here," Ross says plainly. He sees a "well-defined double top around $1,900" and downside risk all the way to $1,300 an ounce. Remember about a month ago when so many people were waiting for $2,000 an ounce? It's probably best to keep those folks away from Mr. Ross.

Copper: Like many, Ross sees Dr. Copper as a great proxy measure of the "vitality and vigor" of global growth. Alas, the copper chart is looking both weak and lifeless. With copper at about $3.25, Ross says the level to watch is $3.08. A weekly breakdown below there and he sees his downside target of $2.75 as fait accompli.

Dollars per Euro: We discussed this relationship abstractly but at some length yesterday. Elaborating on how to trade it in this segment, Ross characterizes the strength of the euro over the last week or so as an "ephemeral countertrend bounce, if you will, that's destined to fail." If you're looking for conviction on the idea, Ross says the euro is "an incredibly compelling short right here." Should the euro be thoughtful enough to rally all the way back to prior support at $1.40, Ross would be inclined to bet the world against it.

As always, this information is yours to use as best fits your portfolio. We want to know your strategy and your thoughts on Ross' work. Take the time to drop us a comment in the space below.

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