What’s Depressing Base Metals Prices: A Visual Guide

Sometimes, it is easy to drive yourself crazy when reading information from all kinds of different sources regarding supply and demand.

Whether it’s market sentiment or political news related to each of the metals your company buys, everyone’s trying to better gauge where prices are heading.

We believe that anything that can possibly be affecting prices – fundamentally, psychologically, politically, or otherwise – is already reflected in the financial markets. Today, we will keep it simple and visually describe what the market is telling us.

All the industrial metal prices are at levels below their levels in the spring of 2011. This is not a coincidence. We believe that market and sector have more impact on the metal price than the specific metal itself, especially when we talk about long-term trends.

The chart below shows the performance of the JJM, an index composed of four commonly used industrial metals: aluminum, copper, nickel and zinc. We can clearly see the downtrend that started in 2011:

jjm index chart
Created using stockcharts.com

So, if the fundamentals of each metal are different, how do we explain these similar price behaviors? In our opinion, there are two main factors pushing industrial metals down.

Factor #1: The Dollar

Base metals are commodities and, as such, move in opposite directions to the dollar.

Over the past several years, every important turn in the US dollar was either followed by, or coincided with, a turn in the price of commodities. Therefore, both markets are closely linked to each other and it would be a mistake to analyze base metals without taking into account what the dollar is doing.

Our technical analysis will continue, and we’ll fill you in on Factor #2, in Part Two…

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