Commodity prices have taken a step back recently, and investors have noticed… For example, the Bloomberg All Metals Index has fallen 8% in just three weeks since its high on May 31.
A lot of this has to do with China’s all-out assault on rising commodity prices that began in late May.
But, all its policies have really done is break the short-term price trend… setting up a better buying opportunity for the “trade of the year” that continues to be commodities.
China’s fear is easy to understand – if higher commodity costs get passed down to consumers, it’ll eventually stall their economic recovery…
In just the last three weeks alone, China has announced three new measures to try to end the year-long commodity rally.
I talked about the first one in early June, with the PBOC’s (People’s Bank of China) announcement in late May that forced financial institutions to increase their foreign currency reserves.
This was the catalyst that created a short-term bottom in the dollar and kickstarted the decline in dollar-sensitive commodities like metals. (Jeff Clark’s Delta Report subscribers have benefited from this decline recently, booking a 58% gain on the Invesco DB U.S. Dollar Index.)
The other two moves were both announced last week…
First, state-owned enterprises were ordered to limit their speculative commodity exposure, and they’ll need to report their futures positions to the state.
In a second development, the National Food and Strategic Reserves Administration will soon release state stockpiles of metals like copper, aluminum, and zinc. The anticipation of a short-term supply shock sent a very bearish signal… with copper now down almost 14% from its highs.
The problem with China’s approach is that it’s no longer the only buyer that can incrementally move prices…
|
Free Trading Resources Have you checked out Jeff’s free trading resources on his website? It contains a selection of special reports, training videos, and a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out. |
Commodities Will Move Higher Regardless of China
In the past, China was able to dictate where prices went because it had been the incremental buyer of metals, energy, and agricultural products. It’s a large economy that’s been growing by leaps and bounds.
But now, demand is coming from elsewhere…
This time, policies in the U.S. are creating the incremental demand.
For the first time in decades, the economy is undergoing a demand shock from both monetary (money printing from the Federal Reserve) and fiscal stimulus through unemployment benefits, tax credits, and infrastructure spending.
By placing stimulus dollars directly in the hands of the consumer, and investing into infrastructure, the U.S. has insured that commodities will continue to move upward – regardless of China’s short-term fix.
Yet, metals have suffered a dramatic decline during this stretch… even though this is exactly the sector that’ll benefit most from the continued economic recovery and recently proposed infrastructure bills.
For example, platinum has now fallen 20% since early May – when speculation of these announcements from China began.
Just take a look…
It’s now back to pre-pandemic levels of $1,050/ troy ounce. Considering how platinum is a key metal in the production of electric vehicles – an industry with demand only pointing upward – prices are at a bargain.
Given the extreme price pullback in these industrial metals, investors can benefit by getting direct exposure through the Aberdeen Standard Physical Platinum Shares ETF (PPLT).
PPLT recently broke through its 200-day moving average, but is making a run at recapturing that technical level. Platinum’s pre-pandemic price level should provide strong support, so I fully expect a 10% move higher to retest its 50-day moving average.
Regards,
Eric Shamilov
Contributing Editor, Market Minute
Reader Mailbag
What do you think about China’s decreasing control over commodities prices? Do you think this recent news is setting up a buying opportunity in metals?
Let us know your thoughts – and any questions you have – at [email protected].