Hi ho silver

Although oil seems to be hogging the headlines in the commodity space these days, there is plenty of interesting price action in other markets as well.   Specifically, silver has been on a ripper recently, taking out all sorts of resistance levels on the weekly charts and looking primed for more gains.  Indeed, the chart is starting to remind Macro Man of GDX, which continues to perform strongly.

Although regular readers will know that your author is not an adherent of metals, be they tin foil or otherwise, he's as much a sucker for a good chart as the next guy.  It's interesting, therefore, that not only is silver trading strongly on its own right, but it's also broken what looks to be a key level against gold as well.

Why is this interesting?  Well, generally speaking silver is a high beta play on commodity strength/dollar debasement...so when it breaks interesting technical levels, it at least throws up a flare that something of note may be going on in the broader market.   Although it's a noisy relationship, over the last dozen years trends in the gold silver ratio (inverted) have generally tracked developments in broad commodity indices fairly well (the chart below shows the CRB in yellow.)

Are there legitimate reasons to think that these moves may have legs, other than chart monkeys piling in?  Quite possibly yes.  Macro Man's work suggests that in addition to trends in the dollar exchange rate, one of the most important explanatory variables for changes in broad commodity prices is the change in real interest rates.  In this sense, the ongoing compression of nominal yields thanks to QE/NIRP/global yield deficit, combined with the recent uptick in inflation, offers a potentially powerful tailwind for commodities- particularly those of a quasi-monetary bent.  As the chart below illustrates, the one year change in real US 10 year yields is close to its most negative level in nearly four years.  Needless to say, much of the intervening period saw increases in real rates that coincided with the collapse in commodities.

China, of course, is the elephant (or is that the dragon?) in the room.  Macro Man's growth proxy remains quite downbeat, hovering near its lows.  That being said, the surge in credit growth is very notable and has yet to really show up in the data comprising the growth indicator.  Moreover, the sell side is getting more constructive as well; both MS and GS have come out this week with upbeat pieces on the near term growth outlook for China.  Should those forecasts materialize, you could add that to the list of factors supporting commodities.

Finally, what of commodity currencies?   Macro Man re-ran his model on AUD/USD for the first time in five months, and what do you know.  Although the model thinks the Aussie should be a little higher than it is now, generally speaking the magnitude of the recent rise is bang in line with what the regression would suggest.

The message, therefore, would appear to be caveat vendor, both for the AUD and for many commodities sensitive to liquidity conditions.   Of course, should commodities rally far enough, that could (and clearly should) have implications for the trajectory of monetary policy in places like the US.  Should that become start to become priced into rates markets (as even Rosengren would like to see), then that would be the obvious time for longs to head for the exits.  Until then, it may well be a case of tuning in to the Lone Ranger for profitable trading advice.

This will be the last missive of this week, as Macro Man is taking off with the Macro Boys for the second half of this week's school holidays.  Normal service will resume next week.