Metals recovered, but is it a new bull trend?

The metals market recovered last week. All precious metals closed higher compared to the preceding Friday. While the LME base metal index also reversed and closed higher, the development within the base metal sector was mixed. Some metals posted even stronger losses.

The technical situation of the precious metals has improved considerably. The MACD has crossed above it signal line and thus triggered a buy signal for all four metals. However, these signals are not very reliable. For example, the recent sell signal for gold was triggered by the MACD at the low reached on May 5. But one should also keep in mind that these signals could be very profitable in the case that the market enters into a new trend, which the trader could ride for some time. Therefore, before following a technical trading signal, traders should still have a look at the driving forces.

Stock markets were a bit in a roller-coaster last week. Economic data released came in below the consensus in cases. Especially the flash estimate of the eurozone manufacturing and service sector PMI, US GDP revision for Q1 and the US pending home sales disappointed. Thus, there is still some fear of a global economic slow-down in the markets. This would not be a positive factor for metals.

Positive for the metals had been that the euro stopped its decline versus the US dollar after falling below 1.40 at the start of last week. However, the rebound appears to be more driven by short covering. The uncertainties about the development in Greece are still high. The statement of the head of EcoFin that the IMF might not approve the payment of the next credit tranche cause a new wave of safe haven buying in the bond markets. However, on Friday, the acting IMF managing director John Lipsky stated that the IMF is still in negotiations with Greece and no decision is made yet. This calmed nerves a bit and contributed to the recovery of the euro above the 1.43 mark. However, it appears to be a sure bet that some European politicians can not keep the mouth shut making the wrong statement at the wrong time and nervous traders sell the euro again.

Positive for the metals markets had also been the buy recommendation from Goldman Sachs commodity strategists. After GS issued a sell recommendation earlier on expectations that commodities would be too expensive, the recent correction pushed prices down to levels, which GS regarded as price targets. As a consequence, GS issued now a buy recommendation.

One condition for a new upward trend in precious metals is that investors increase their positions again. According to the latest CFTC report on the “Commitment of Traders”, the large speculators have increased the net long position in gold in the week to May 24 by 7,791 to 172,394 contracts. In silver, the non-commercials added just 148 contracts to their net long position in futures. In platinum, they reduced the net long position further. Thus, there are positive signs that investors return as buyers to the market. However, as one swallow does not make a summer, more evidence of buying by large speculators would be needed.

As long as the markets are still concerned with the outlook for global growth, the recent recovery might be on a shaky basis. Especially as the rebound of the euro appears to be driven more by short covering the risk is that this short covering rally might not last long.