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Metals rally is set to step it up a notch vs. tiring stocks bull

Bloomberg Intelligence April 2, 2018

This analysis is by Bloomberg Intelligence analyst Mike McGlone for the Bloomberg Commodity Outlook.

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The youthful metals bull is set to prevail vs. a stock-market run that's closer to retirement. A bottoming VIX and escalating trade issues have pressured industrial metals into good support areas, backed by increasingly favorable bullish drivers. A gold rally is a matter of time.

Metals are rested for rally resumption

Essentially unchanged since late August, metals appear well rested to resume a rally. With the Fed's March interest-rate hike past tense, the positive forward-looking drivers indicate the next stage of a stair-step recovery. The increasing fed funds target signals a recovery that coincides with increasing economic growth and inflation risks, which are positive for metals. The sector also tends to back up into rate hikes, then recover.

Since the March 2017 rate hike, the Bloomberg All Metals Total Return Index has gained about 10% vs. a 6% decline for the trade-weighted broad dollar. With a high annual negative dollar correlation (0.74) and beta (3.05) since 1996, metals have plenty of upside with a peak greenback.

Next Stage of Stair-Step Rally for Metals

Gold up vs. copper down an ominous indication

Gold atop the 1Q list of top-performing metals vs. copper and aluminum near the bottom is an ominous economic indicator. Precious metals outperforming industrials is typically coincident with a bottoming VIX and peaking bond yields — both clearly evident near the end of March. The Fed's latest rate hike boosted gold to the top of the March and 2018 leader boards, up about 1%. Stock-market volatility, inflation and a declining dollar are a strong combination for higher gold prices.

The Bloomberg Industrial Metals Subindex Total Return, down 6.5% in 1Q, denotes mean reversion in the strong bull market since the start of 2016. It's deja vu for base metals vs. a year ago, bottoming in June near the 52-week mean before resuming the rally.

Dollar Weakness Should Be Next Big Story in Commodities, Metals

A preemptive recovery in metals prices, notably for aluminum and copper, indicates impatience for the range-bound dollar's decline to continue. Metals' correlation to the buck is the most negative among commodities. Record long positions in euro managed-money net futures and dollar-index shorts reflect some suppression of the greenback's bear trend. These positions may need to be flushed for the dollar downtrend to resume. Confined for the past 12 weeks below 2016-17 lows, the Bloomberg Dollar Spot Index is a bigger-picture indication of further weakness.

The buck is ripe for a catalyst. It may come from the Chinese yuan, up about 8% vs. the dollar since the U.S. presidential election. Copper and aluminum have recovered sharply, but were too cold near their 52-week means with favorable drivers.

Range-bound Dollar Likely to Decline

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