Silver And Copper Already 10% Down in August

Commodity prices have been trending lower on poor Chinese data over the last few days, but is there a chance for a recovery for Silver and Copper, considering their 10% drawdown in August?

A Bit of Relief?

Earlier in the week, copper prices hit an 11-week low but managed to stage a rebound, while Silver hit an 8-week low. Both commodities have already seen falls that reached 10% drawdowns in August. A host of negative data out of China over the last several days has worried investors as fears of contagion develop. The precipitous drop in China's trade activity in July keeps the commodities market under pressure, with emphasis on two fronts: The flagging housing industry, which accumulated 17 consecutive months of falling investment, and demand for solar panels. Those two issues impact copper and silver, respectively. Thursday saw commodity prices gradually rebound as the Chinese government rolls out more stimulus, but it might need a more permanent change in the market to sustain demand.

One of the main uses of silver is for solar panel manufacturing, where China remains a dominant producer, making up to 80% of the modules available globally. Demand for solar panels remained robust in the July trading data, but that appears to be for inorganic reasons. Europe is stockpiling solar panels, inevitably buying more from China and keeping solar manufacturers buying silver. But that leaves the market subject to geopolitics. Europe's interest in solar panels is strategic, and the Chinese government is looking to ban exports of key solar technologies in ongoing trade conflicts with the US and Europe.

Looking to the Future

While demand for copper is expected to be sustained to power the energy transition away from fossil fuels, the main use for the metal is still in construction. China is by far the largest global importer of copper, accounting for 59% of the market. Now that China's housing industry is once again being embroiled in financial problems, with major construction companies at risk of default, one of the largest end users of copper in the world is at risk.

Investors hope the Chinese government will announce more stimulus packages to shore up the flagging housing industry. That could get demand for copper back on track. But some analysts point to signs that the Chinese government is pivoting its focus to other areas to maintain economic growth. Housing has been the pillar of the Chinese economy. Still, strategic interests have seen the government focus more on developing the high-tech industry, which has outpaced growth compared to traditional industries. This leads to warnings that the government might have a tepid response to the current housing crisis as it looks to shift away from infrastructure and real estate towards consumption. High tech does, of course, use some copper and silver, but not at the bulk levels that industrial production of solar panels and housing. Without an announcement of stimulus for traditional industries in China, both copper and silver could be under pressure in the coming weeks or even months.

Silver Correcting Broadening Wedge

With Silver trading twice as high as copper from summer 2022 lows, the upward leg from $17.50/oz to $25.95/oz may be due further correction. Broadening wedges are typically followed by deep pullbacks equal to the golden pocket depth, marked shy of $20/bbl, and the 78.6% retracement at $19.30/oz. On the other hand, shallow corrections are often completed around 38.2%-50%, opening up the next support at $21.90/oz. If $22.40/oz holds firm, breaking past $24.75/oz may see $27.50/oz give way to bullish price action, clearing the path to $28.30/oz.

Source: SpreadEx / Silver

Key Takeaways

Silver and Copper experienced a 10% drawdown in August, negatively affected by China's trade activity and the declining housing industry. Copper is primarily used in construction, and China's housing industry's financial problems put the market at risk. Investors are hopeful for stimulus packages to revive the housing industry and boost copper demand. In contrast, demand for silver is influenced by the production of solar panels, with China being a dominant producer. However, the potential ban on exports of key solar technologies from China may impact silver demand. Still, there are concerns that the Chinese government is shifting its focus towards high-tech industries instead. This could result in a tepid response to the current housing crisis, putting pressure on both copper and silver in the near future.