COPPER´S COLLAPSE BUGS SILVER / MACLEOD FINANCE

Copper’s collapse bugs silver

Trump backing off on copper is hitting all metals. US tariffs are in disarray and are backfiring badly on the US economy and the dollar. The case for gold and silver is even stronger.

ALASDAIR MACLEOD

With Comex’s August contract running off the board and copper’s collapse it is hardly surprising that precious metals traded lower this week. 

In European trade this morning, gold was $3294, down $43 from Friday’s close, and silver at $36.48 down $1.65. 

The gold/silver ratio has returned to 90.

Before observing this week’s action in gold and silver, a comment on copper and other base metals is required. 

President Trump has relented on US import tariffs on copper ore, concentrates, and cathodes leaving 50% tariffs on imports of semi-finished items such as wires and pipes. 

Consequently, copper futures fell by 25% this week hitting every paper-traded metal, including silver. 

Copper’s chart is below:

In a longer-term context, this has not damaged copper’s bull market, which remains intact and if nothing else reflects the dollar’s declining purchasing power. 

More importantly, this episode serves as evidence of the severe damage US trade tariffs are doing to the US economy. 

Even Paul Krugman, who won his Nobel prize for trade theory opined that “We’re looking at a shock to the economy seven or eight times as big as Smoot-Hawley”.

50% tariffs remain on imported steel and aluminium. 

Given the climbdown on copper, these are almost certainly next. 

This is the context in which the dollar is to be valued in future. 

And given that the dollar’s value is determined by foreign holders owning over 30% more dollars and financial assets than the entire US GDP, this is not a trivial matter. 

Even against other currencies in their own debt traps and a declining ability to service their ballooning national debts, measured by the trade-weighted index the dollar is falling:

The dollar has rallied into overhead supply, a normal move, but the moving averages still scream bear market.

Krugman’s point will surely become more widely understood. 

The damage being done to the US economy and therefore the dollar is not yet reflected in headline statistics but is undoubtedly immense. 

And it is this damage that will determine its future exchange rate not just with other currencies but particularly gold. 

The next chart shows a very bullish pennant pattern for gold which merits close examination.

The pennant is delineated by the pecked lines. 

Its flat top suggests that the subsequent move up when the level is broken ($3440) will be the minimum projected by this pattern. 

That gold has overshot on the downside of the pattern is not unusual and given the disruption from copper is of no concern.

Once the $3440 level is surmounted, the minimum target is determined by the move into the pattern from the last significant consolidation, which is arrowed. 

This move is worth $900, which added to $3440 gives a minimum target of $4340, taking a similar time to the preceding move which is five months — in other words approximately at the year end.

This outcome might seem fanciful, but in the context of a) a US economy being badly undermined by tariff policies; b) stubborn and rising inflation being driven by the dollar’s falling purchasing power; and c) foreign holders selling dollars to avoid mounting losses it is eminently possible.

In this context, the reaction of silver presents a heaven-sent opportunity for those wishing to hedge this outcome. 

There is little doubt that silver’s sharp fall has been exacerbated by its role as an industrial metal alongside copper, and that the paper shorts are making hay out of the situation. 

But this is purely short-term thinking, whipsawing speculative traders.

The silver chart shows a reaction back to the 55-day moving average where it can be expected to find support. 

This is next:

At a guess, speculation will turn to precious and base metals whose prices may have been buoyed by Trump’s tariffs. 

But for gold and particularly silver stackers, it represents an opportunity to escape the mounting chaos engulfing the US economy and the dollar.