The outlook for precious, base metals

Profit-taking is undermining the precious metals markets and, from a technical point of view, we expect gold, silver and platinum to remain subdued over the coming months. In a reversal of last year’s outlook, palladium is showing potential for a sustainable rally.

We are expecting the uptrends in aluminum and copper to accelerate in the first quarter. However, the uptrend in nickel is over, and tin is threatening to reverse its uptrend.

— Gold — The medium- and long-term trends are positive for gold but the short-term outlook is negative. Gold has a strong tendency to perform in an extreme fashion and correct itself in the first quarter, and this year has been no exception. The 9-month Relative Strength Index (RSI) has reached overbought territory, and on previous occurrences during the past decade, this has been followed by a 3-month reversal. Assuming a 38.2% retracement of the rally from US$319.25 per oz. to US$430.50 per oz., we are expecting a correction to $388. After unwinding the overbought signal, the longer-term trend should slow the decline; we are targeting US$480 per oz. later in the year: buy dips against US$389 per oz.

Three times during the past decade, the 9-month RSI has been lifted into overbought territory, and each time, this signal was followed by a 3-month correction. The RSI reached overbought levels in December 2003.

— Silver — The rally over the past 12 months is currently of the same magnitude that the 1997 rally was to the decline between 1987 and 1993 (that is, just over two-thirds). At the moment, the uptrend remains intact, but important resistance is looming large; 6.8350 is a longterm trendline, and 6.9375 represents a 75% retracement of the decline from 7.9000 to 4.0500. In addition, the rally in the fourth quarter lifted the price above the upper three standard-deviation Bollinger Band (based on the 20-month average), and historically a breakout above this band has not proved sustainable and has triggered a deep correction in the following month. In the light of this evidence, we are expecting a 2-month period of consolidation (US$5.93 to US$6.83) before silver can decisively test US$6.94 and open up the potential for an accelerated rise to US$7.90.

— Platinum — Platinum held up remarkably well in the teeth of a general dollar reversal at the start of the month, but the failure to consolidate above US$840.50 per oz. in late January represented the first crack in the facade of invincibility. The 9-week RSI is rolling over to produce a bearish divergence signal. To see such a signal indicates that the long-established uptrend is losing momentum; profit-taking has begun, and this signals a major top is forming. Assuming a close below US$847.50 per oz. at the end of January, we have flipped our short-term view to bearish; lock in profits as the near-term risk is for a retest of the 60-day moving average at US$822.75, and should that fail to hold, then the decline could develop into a rout and the downside would open up to US$767 per oz.

— Palladium — Trend channel support has held firm, and palladium is eroding long-term resistance. A monthly close above US$236.15 per oz. would imply that the downtrend from the 2001 high is finally over and a sustainable recovery begun.

From a technical perspective, palladium was the least attractive precious metal throughout 2003, but this year the situation has changed. Palladium has not only sustained a breach of the 60-week moving average for the first time since the first half of 2001; it has risen above the high posted in September 2003. Daily RSIs show the rally is over-extended at present, but we would view a period of consolidation above US$204.50 per oz. as a positive development. A monthly close above the 20-month average at US$236.15 per oz. would provide confirmation that the downtrend from US$1,113 has finally ended and trigger a relief rally to US$274 per oz. (the 2003 high). Buy dips against US$205 per oz. with a stop below trend channel support.

— Aluminum — We are impressed by the steady unrelenting nature of the recent rise and note that the pace of the move is slowly increasing. There are few signs that a top is forming, but plenty that suggest the uptrend is healthy and will continue. Following the breakout above US$1,649 per tonne, we are expecting the pace of the uptrend to accelerate, and we are targeting trendline resistance at US$1,722 per tonne. A breakout above US$1,755 per tonne should be the catalyst for an explosive trend acceleration to US$2,000. Over the coming two months, we expect aluminum to consolidate above US$1,588 per tonne.

— Copper — A large double-bottom low formed following the sustained breakout above US$2,036 per tonne in 2003, which implied copper is heading to US$2,738 per tonne this year. Ahead of that objective there are retracement levels at US$2,497 and US$2,642 (respectively 66.6% and 75% retracement level of the fall between 1995 and 2001), but we only regard these as potential brakes on the rise. We would compare the current situation in copper to that in lead during October 2003; the rally has come along way, but it still appears healthy. Think positive; think acceleration; think US$2,738 per tonne by the summer.

— Lead and tin — In the base metals markets, thus far only nickel has actually reversed its 2003 trend, but in some of the other, smaller markets, there are signs that the rallies are faltering — for example, a marked divergence between the price of lead and its 9-day RSI warns that the uptrend there is losing momentum; when this signal repeats on more significant weekly charts (it would take a close below US$742), then we would switch from a bullish to a bearish near-term view. In tin there was a key day reversal on Jan. 6, but for the time being, key support at US$6,150 per tonne is holding, and so too is the 40% RSI level. Nevertheless, divergence between price and the 9-day RSI warns of a top, and we are switching from a bullish to a neutral/bearish near-term view: it is time to lock in profit either on a rally towards US$6,650 or on a failure of the US$6,150 support.

— Nickel — A large key-day reversal in early January punctured the bubble in nickel. The uptrend is over and nickel has moved from being a stable and orderly market to highly unstable: the only certainty going forward is that trading is going to be extremely volatile. Over the course of this year, the probability of a retest of both US$10,440 and US$17,700 per tonne is high. The influence of the uptrend will linger, and the tendency will be for prices to rise much faster than they fall. In the near term, the risk is for a return to US$12,577 per tonne (38.2% of the rally from US$4,290 to US$17,700) before a rebound to US$16,500 per tonne. Long gamma positions should be attractive in this environment.

— Zinc — Fibonacci resistance at US$1,051 per tonne has effectively capped zinc this year. As that level represents a 61.8% retracement of the decline between 1999 and 2002, it would be tempting to conclude that the uptrend of the past 12 months is over. However, there is no evidence that would actually support such a view — no trend-ending formation or evidence of the uptrend losing momentum. In the absence of such signs, we assume that the long term remains healthy and zinc is building a springboard for a further rally in the first quarter to US$1,118 per tonne, or even higher. Buy dips; stop below US$1,000.

— The above technical analysis is entirely independent of Barclays’ fundamental analysis. The opinions presented are the author’s and do not necessarily represent those of the Barclays group. For access to all of Barclays’ economic, foreign-exchange and fixed-income research, go to the web site at barclayscapital.com. Queries may be submitted to the author at phil.roberts@barcap.com