Firstly, though, it's worth explaining how Coppock works for those unfamiliar with the system. Conceived by Texan financial analyst Edwin Coppock in the 1960s, the approach is designed to generate long-term buying signals based on a moving average of the difference between an index's current level and the level 11 and 14 months earlier. We've previously back tested it and found that it's successfully identified the start of many major bull runs, and occasionally delivered some timely sell signals - although we have always been conscious that these have proved less reliable, possibly highlighting short-term dips in long-term upward trends. We've also only relatively recently begun to track commodity indices - because conventional wisdom says that they behave differently to equity markets, forming tops and bottoms slowly, it had been suggested that the Coppock index wasn't appropriate. Our back testing suggested otherwise, though.
But we still need to look beyond Coppock to get a feel for the direction in which these two commodities might head, and by happy coincidence it happens that this week's magazine is chock full of views on which way commodity markets might turn next. Gold and other precious metal charts fall under the Trader's scrutiny this week, and are supportive of the view that we should not blindly follow Coppock's signals. The gold price does at least have some technical support, and it's noteworthy that gold miners have benefited from relative price stability over the past year. But, with the view that we are about to witness runaway inflation or the collapse of western civilisation as we know it only held by die-hard contrarians, huge price appreciation can hardly be expected.
The prospects for oil, meanwhile, hinge upon the course of action taken by Saudi Arabia over the next few months, a point made by our columnist John Baron in this month's investment trust portfolio update (John, incidentally, is selectively topping up his commodity holdings). The story has it that the Saudi's are continuing to produce heavily into a glut, which is depressing the price, in order to force marginal US shale production out of the market. But as one industry expert pointed out to me this week, many US producers are hedged for another year or two yet and are producing much more efficiently, while budgetary pressure means the Saudis may be unable to maintain the strategy. If they blink, the oil price may jump, and in that respect the risk appears to be on the upside right now.
