Silver investors should keep one eye on the broader commodity complex at all times. This is now more than ever.
According to the latest demand statistics out of Thomson Reuters, only 20% of physical silver demand in 2016 went for investment purposes. This is in silver coins or silver bars. As a silver investor, you are still in the minority as far as usage of this precious metal goes.
The other 80% of silver demand? It went toward industrial fabrication and jewelry.
To a large extent then, silver prices are going to be pushed or pulled. This is in the general direction of the broader industrial commodities at this juncture. There will come a time when investors demand a more significant portion of silver. A falling US dollar or stock market will cause this. That but that time is in the future. It would behoove us therefore as investors to pay close attention to the broader commodity complex.
The CRB Commodity Index
When we talk about commodities, the broadest measure that we have available is the CRB Commodity Index. This index is an average of 19 commodities from around the demand spectrum. It includes both silver and gold. It also includes aluminum; cocoa; coffee; copper; corn; cotton; crude oil; heating oil; lean hogs; live cattle; natural gas; nickel; orange juice; soybeans; sugar; unleaded gas; and wheat. It is not a perfect index. It is the most diverse measure of commodity prices that we can track going back multiple decades.
From a price analysis standpoint, the most critical aspect is that broad commodities are presently just above 40+ year low levels. These are commodities that represent the CRB Index A picture is worth a thousand words. So below, we present the CRB Index from 1974 through the present:
Recall that commodities, being real assets, cannot go to zero. Commodities have never have been worth zero. They never will. This is the lowest price level for the commodity complex that we have seen in over 40 years.
Indeed, from a risk to reward standpoint, the proposition of an asset class at its lowest valuation is in over a generation. It cannot go to zero. So, it whets our appetite. (In contrast, individual stocks, bonds, or currencies can indeed become worthless.)
Note the previous times when commodities bottomed near the 180 – 200 support zone on the index. Marks of similar lows include the dot-com bubble, the recession of 2001-2002., and the worldwide financial crisis.
The major point for us, as precious metals investors, is to know is this. With silver, broader commodities still influence a significant portion of the demand spectrum. Note how similar the price trajectories were between the CRB and silver from 2003 – 2008. This during this major advance:
Let us zoom into the bottoming process that is underway. The following chart encompasses just the final two years of the first 43-year chart :
Note how broad commodity prices have broke through their short-term declining trends in late August. (turquoise color). They have surged over the past two weeks by over 7%. Indeed, we see here commodities now making a functional retest of their 2016 – 2017 peaks. These are between 190 – 196 on the index.
What is next for the commodity space?
We do not expect the CRB Index will break it’s 2016 – 2017 resistance zone immediately on this attempt. Indeed, some consolidation toward the 176 – 179 support zone would constitute more healthy price action over the intermediate term.
However, the critical point is that the broad commodity sector is putting in a low of multi-decade significance. We suspect that prices may never again fall below the 156 level. We see this on the CRB index in February 2016.
Each commodity will inherently move at different times for a diverse set of fundamentals. Hence the saying, “a rising tide will lift all ships.” The theme here is that real assets are forming long-term bottoms. This is at a time when financial assets are at risk of developing long-term tops. (These include US bonds, US dollar, many sectors of the stock market)
Strong confirmation of this bottom process will come when the 196 level, matching 2016 – 2017 highs, is broken decisively. We anticipate this will occur in 2018.
Takeaway on Silver and the Commodity Complex
Silver investors should keep the long-term commodity price chart in mind at all times. Silver prices are still largely influenced by world industrial demand for various commodities. The CRB commodity index is bottoming at 40+ year lows. As investment demand enters the entire sector again, we expect silver to be a primary beneficiary.
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq.
Technical analysis shares many similarities with mapping. They both base on the observations of repeating and embedded patterns in human nature.
His strategy of blending behavioral and technical analysis has helped him and his clients. It helps to identify both long-term market cycles and short-term opportunities for profit.
This article is third party analysis. It does not necessarily match views of Bullion Exchanges. Readers should not consider it as financial advice in any way.