How the Selloff in Metals Market Creates Opportunities for Traders – Introduction
This year is turning out to be quite difficult for the commodities market. Agricultural commodities like corn and soybeans have been major underperformers and are currently trading at multi-year lows. The performance for these commodities has been affected by the ongoing trade crisis, which has seen countries introduce tariffs and counter-tariffs. For agricultural commodities, the performance has been mostly affected because the United States is one of the largest producers. The country is endowed with big plain land and climate that enables it to be a major producer.
Metals too have continued the underperforming trend. The chart below shows that the major metals have fallen by double digits this year.
Metals have fallen this year mostly because of the ongoing trade crisis and the perceived supply glut. Gold has been an outlier. Its decline has been attributed to the strong dollar. In the past, I have written about the special relationship between the two securities. When the value of the dollar falls, the price of gold tends to rise as traders move their assets into gold, which is a safe haven security. The chart below shows the performance of the dollar and gold this year.
As shown above, the dollar index has gained by 2.6% while that of gold has declined by 6.3%. Meanwhile, silver, the so-called poorer cousin of gold has declined by more than 7%. The strong dollar has also affected the other commodities which are usually quoted in dollars. As the dollar strengthens, the commodities that are quoted in dollars tend to see higher prices.
Early this year, the trend in the metals industry was overall positive as traders placed their bets on a strengthening economy. This was just shortly after the tax reform process that happened in the US. Then, things changed when the focus shifted to trade and the barriers that exist. Traders started to place their bets that a disrupted global economy would mean low demand for the metals. As shown above, this has led the price of the metals to fall.
For traders, these market moves in the metals space has not been a major loss factor. This is because traders are not long-term investors who invest on macro themes. These investors use models to predict the future of the asset prices based on the macroeconomic themes. When their assessment turns out to be wrong, they are forced to take huge losses. On the other hand, traders don’t focus on the macro themes. They focus on the intraday price changes and aim to profit during short-term price movements.
The falling metals prices has also presented opportunities to traders who can now trade more for less. For example, the price of gold has fallen to about $1200. This means that a trader can trade more gold at the previous prices when the precious metal traded above $1300. The same is true for other metals like platinum and palladium, which have moved below the $1000 and $900 levels respectively.
In addition to this, the current levels provide an interesting opportunity for medium-term traders who hold assets for a few weeks. It also presents opportunities for swing traders who hold their positions open for a few days. This is because they can see short-term opportunities and trade in them.