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The Relief Rally

May 2016

By Bruce Powers, CMT, Chief Market Analyst at, and President at WideVision

The commodities spectrum, which has been in a downtrend, is finding some support. The key factors however to look for are the FOMC and BoJ

While gold has languished over the past couple of months, trading within a range of $1,284.7 and $1,206.32, silver shot up to an eleven-month high of $17.70 last month, and precious metal stocks have been on a tear. Meanwhile, the US dollar remained under pressure, helping to support strength in overall commodities, including oil.

Attention moves to miners
The Philadelphia Gold and Silver Index (XAU) is an index of precious metal mining companies traded in the US. Since hitting a bottom of $38.36 in January the index has appreciated by as much as 122.3% as of last month’s $85.27 high, which put it a 19-month high. Two of the more popular miner ETFs, Market Vectors Gold Miners ETF (GDX), and Market Vectors Jr. Gold Miners ETF (GDXJ), were up as much as 92.1% and 112.4%, respectively, since coming off their January lows. Each also hit 19-month highs. Such a strong recovery in the sector in a relatively short period of time improves the chance that a bottom has been put in, at least for a while. The sector is now a bit extended in the near-term and a retracement and some degree of consolidation can be anticipated, as well as with gold itself. Once the consolidation phase concludes, upward pressure from the bulls should return.

Silver starts its comeback
Silver had initially been lagging the recovery in gold, but has now taken a front seat as it has many times historically. As of last month’s $17.70 high the precious metal had advanced 29.7% above the January low of $13.65, and was at an 11-month high, just shy (by $0.08 cents) of a 15-month high ($17.78). For comparison, gold had gained 22.8% off its January bottom at its March high of $1,284.73. As with the miners we should see a retracement in silver from the 2016 high down to at least $16.36 if not lower ($16.15), before it is ready for another leg up and takes another shot at breaking through the 15-month high. If it makes it, the next higher target zone would then be approximately $18.48 to $18.55.

Recovery in commodities continues
We completed another positive month for the recovery in overall commodities, with the Commodity Research Bureau Index hitting a four-month high. This puts the index up at least 18.0% above the lows from the first two months of the year. Strength was seen in oil, with both Brent and WTI crude reaching five-month highs. Each has risen over 70% from the lows made in January and ended April strong. Industrial metals have also been in recovery since the January low, including iron ore and steel. In particular, copper, considered a leading indicator for the health of the global economy, completed its third month of positive performance. Although, copper did not exceed the prior month high. Last month’s price action indicates commodities should improve further. However, short-term strength in the dollar could stall an advance until a retracement and consolidation of gains completes.

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