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• Looking over the key commodities

• Gold & Silver price movements

• Dr & recent falls

This week…

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This week we look at the following topics:• Looking over the key commodities•Gold & Silver price movements• Dr & recent falls

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Dear Readers,

Throughout the monthly of October we will be publishing our views and insights on commodity prices after they have been absolutely savaged during the month of September. We thought this would be a great opportunity to run through some of the key markets that Invast quotes on its MT4 platform and compare price action against fundamental information. Invast clients will also have access to a webinar presented by Invast Insights editor Peter Esho on Tuesday 28 October at 6:30PM.

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Our focus will be on base metals and bulk commodities this month, all under savage price action as of the time of writing as global investors anticipate higher interest rates in the United States and drive up bond yields, in turn adding upward pressure to the US dollar. As a general summary, we think of commodities in the following two ways:

1. Industrial commodities – These are commodities like oil, copper, iron ore, nickel, zinc, tin and natural gas which are used in the production of goods and services (industry); and2. Currency commodities – These are commodities like gold, silver and platinum which have little industrial use and more currency elements.

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Our weekly summary will be as follows:

• Week commencing 6 October 2014 – a quick look over the price performance of key commodities• Week commencing 13 October 2014 – fundamental drivers behind the industrial commodities• Week commencing 20 October 2014 – the impact of China on the bulk commodities, namely iron ore and coal• Week commencing 27 October 2014 – medium to long term trading ranges for the key commodities and also a look at cross pairs like the gold to silver or gold to oil ratio.

• Week commencing 6 October 2014 – a quick look over the price performance of key commodities

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We will also have a strong look this month at the impact of the slowdown in China and just how serious the situation in that economy is at the moment. Any discussion on commodities needs to look very closely at China because of the sheer size of China’s consumption appetite. Below is a chart from Rio Tinto – a stock which generates 90% of its earnings from iron ore.

Many of you reading this report will know very well the steep fall in the iron ore price in recent months, down from as high as US$180 per tonne in recent years to around US$80 per tonne as of the time of writing in early October. Rio obviously has a vested interest in talking up the iron ore market and China is the largest consumer of iron ore.

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China generates more than 50% of the world’s steel. The chart above shows it consumes around 700m+ tonnes of steel per year. A significant slowdown in the Chinese economy is the key fear in global markets are the moment. The sentiment around China has seen not just the bulk commodities decline but also energy and base metal prices. Copper for example is about to retest its long term support level near US$3/lb for the second time this year. The protests taking place in Hong Kong could signal further challenges for the Central Government in China but we just don’t know how this will pan out. We don’t have a feel for political movements, intentions, reprisals or repercussions. All we are doing here is pointing out the fact that our discussion this month around commodity prices needs to be made with a very close eye around China, as the likes of BHP and Rio Tinto have articulated in their presentations for most of the past decade.

For our copper and nickel price charts this week, we will be using data from www.kitcometals.com because the charts correspond very well with stockpile levels at the London Metals Exchange. Other charts will be sourced via MT4.

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Things don’t look great for copper. Often called Dr Copper, this is perceived as one of the key indicators of economic health. China is a huge market and in recent year consumed around 35-40% of total global production.

We are seeing a retest of the US$3/lb level which should hold. If US markets fall completely out of bed, there could be more risk to the downside like the 2009 GFC. Otherwise ok.

Stock levels though as highlighted here are historically very low. This should provide support.

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Nickel rallied strongly this year off its five year lows after several countries including Indonesia introduced export bans, igniting fears of a shortage.

As he stockpiles show here, stocks have continue to soar way past give year historical levels. It seems as though there is now a huge oversupply of nickel on the market and it would seem very off for Nickel to hang onto its recent price gains.

With copper in trouble, it is likely to follow suit towards the five year long term average near US$6/lb.

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Gold:

The best thing to happen to gold this year is a stabilisation in price. We have seen the average true range in gold consolidate – the hot money has left the market and the natural buyers are undeterred. Gold producers have also been struggling with rising costs and currency fluctuations. It has become very difficult to gold companies to source capital from fragile and wary stock markets. Mining companies find it very difficult to source debt, particularly emerging producers and so the result has been a very timid situation in the gold mining industry. Readers of this publication will know that we are generally positive on gold, because of various reasons which we will reiterate this month.

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Chart courtesy of Invast MT4

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The chart above shows the gold price on a daily chart via Invast’s MT4 platform. While the trend is still down, there seems to be a general sense of stabilisation at around US$1200/o which we think will hold during this month, particularly if US markets fall from all-time highs. The most important part of the chart shows the Average True Range of gold over the past year. Volatility in price has been relatively low, we’ll discuss later this month if it is about to rise and where the range sits relative to historical averages. We’re generally bullish on gold.

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Silver:

Like gold, silver has seen some much needed stabilisation in price during the past year and the Average True Range is also at the bottom quartile of its recent range. We generally have a stronger tendency towards gold than silver. We view silver as performing well during higher risk tolerant periods in the market, particularly towards commodities, but this is unlikely to be the case.

We will though study things closely this month in the demand and supply of silver. There could be a surprise to the market, the gold to silver ratio is currently sitting at around 70x and it has been as low as 45x over the past few years – so our neglect for silver and the associated weakness over the past year might actually bring forward an opportunity. We’ll discuss this in more detail during the webinar as a trading strategy. For now the chart below highlights the price action.

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Chart courtesy of Invast MT4

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Next week we will look at the fundamental drivers behind copper, nickel, gold and silver. We will also touch slightly on the iron ore market but since this isn’t currently a market quoted on Invast’s MT4 platform, our focus on iron ore will be more as a lead or lagging indicator towards copper – by far a more transparent and liquid market opposed to spot iron ore. We have also touched on the iron ore market when discussing individual stocks in our prior reports last month. We will discuss iron ore and goal in the third week of this month in the context of energy consumption and touch on natural gas which is an Invast quoted security.

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Commodities outlook: Join the webinar to discuss these points

Invast Insights editor and contributing author Peter Esho will summarise the October outlook guide for key commodities – copper, nickel, gold and silver - in this exclusive webinar. Esho is a regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’. In his webinar he will outline:

Current price actions on the key commoditiesFundamental drivers behind demand and supplyThe impact of China – are things about to change?Trading key cross pairs like the gold to silver ratio and gold to oil

Peter’s webinar will cover both the fundamental and technical outlook on key commodities quoted on Invast’s MT4 platform, plus the key drivers to look out for when trading. This webinar is expected to fill fast. Q&A will be open straight after the presentation. Register now by visiting http://www.invast.com.au/webinars.

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Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

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DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

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