The result is a failed bottom breakout of the commodity space. Hedge fund and index fund selling following the US / Chinese tariff wars have caused the commodity complex to fail to eclipse its 2015 – 2018 resistance zone (above, black) on a sustained basis.
Failed Bottom Breakout
A failed breakout of a bottoming attempt does not mean the sector must collapse. The most significant decline in commodities occurred from 2014 – 2016, when oil fell by 70%, soybeans fell by 40%, and gold fell by 35%. Now at 40+ year lows, the majority of the decline is behind us.
Still, a failed bottom breakout can mean that the sector must consolidate under the recent range (2015 – 2018 resistance zone, black) for months or years further. Closing this week at 193 on the CRB index, the commodities find themselves without significant support until the 176 – 178 zone (green) labeled above is tested. This will represent approximately an 8% further decline expected over the coming months.
Commodity Rebalancing and Gold
Over the past week, gold fell by just over 1.0% to close at $1,241. Meanwhile, the CRB commodity index fell by nearly 2.2%. We can see thus that gold held up better than most commodities. However, there is a delay effect with respect to index fund selling, as most funds rebalance their holdings monthly or quarterly, not daily. If such rebalancing were to cause gold to fall the 8% that we expect most commodities will over the next several months, such would represent a $100 decline from present levels, targeting $1,140.
The point here is that we can see how US and Chinese trade wars are causing direct selling in the commodity sector, which will, in turn, cause weakness in precious metals — unrelated to any specific gold or silver negative fundamentals.
Takeaway on Commodities and Tariffs
As a final point, we wish to remind readers that although commodities and metals may suffer over the short run, the entire complex is still just two years removed from 40+ year lows. It is unlikely that significant further price declines await from such multi-decade lows. However, what may indeed happen is that the bottoming process extends beyond a simple 3-year affair, as the sector shrinks capacity in response to low prices, in turn lowering supply. Lower supply will, of course, eventually result in higher prices – it is simply a question of timing.
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