Silver Analogies, Copper's FAKE Breakout, and Tariffs

Dr. Copper can have meaningful insights into the health of the economy. But what if the Dr. himself is sick?

The precious metals market is relatively calm today – just small declines across the board.

This doesn’t mean that we have no interesting news to report – they are simply not that clear at the first sight. Gold moved slightly lower, and so did the rest of the sector. One interesting thing that’s not visible above is happening in the GDXJ, and something quite different (and even more interesting) is happening on the copper market.

Let’s start with GDXJ.

The proxy for junior and mid-tier miners reversed yesterday and this was the seventh trading day after we saw the black candlestick that was heralding an upcoming top. In previous two out of three cases, the top formed on the very next day, and in the remaining case – in February – it formed after seven trading days.

I marked both cases with orange rectangles. So far, today’s decline is tiny, but it might be the start of something profound. Especially that the volume during yesterday’s move higher was very small – which is a sign of exhaustion. The buying power is drying up here.

Moving on to the situation in copper – the latter just broke to new highs.

Bullish?

Absolutely not. And it’s not just because the breakout is not confirmed yet. It’s not just because of today’s reversal. It’s also because this is absolutely typical for copper to form its final top in this way – slightly above the first one.

That’s how copper topped in 2008, and that’s how copper topped in 2022. In 2011, there was also a final attempt to move higher, but back then there wasn’t enough strength to move to a new high.

Either way, copper’s final tops aligned with major tops in the precious metals market – in particular ones in mining stocks and silver (and the orange, vertical lines show that).

Those were not some short-term indications. No. Multi-month declines followed that created small fortunes for those who were correctly positioned to take advantage of those moves.

Why would copper be rallying now? And why is this move likely fake?

Tariffs and tariff threats. I already wrote about that on March 5, and we pretty much go more or the same since that time. The announcements and threats were what kept pushing prices higher, but the final effect is likely to be bearish.

 

The Tariff Effect on Copper: History Repeating Itself

My March 5th analysis on tariffs and their market implications provides crucial historical context for what we're witnessing now in the copper market. The relationship between tariff announcements and copper prices follows a remarkably consistent pattern:

"Remember how when the tariffs were announced, copper rallied very temporarily, and I wrote that it was likely the top at that time (and it was)? We're likely seeing the same kind of effect right now in the case of copper and the opposite in the USD Index."

This temporary euphoria in copper markets is currently being replayed as Trump's April 2nd "Liberation Day" approaches. What's particularly significant is how the pattern typically unfolds:

"Copper soared once again, and this move is likely fake, exactly for the same reasons it was likely fake previously when the tariffs were announced. Just as copper declined shortly thereafter (and FCX declined much more), the same is likely this time."

 

Historical Examples of Tariff Impact on the USD Index

My March 5th analysis documented several historical cases of tariff implementations and their market effects, providing a roadmap for what we can expect now.

US-China Trade War (2018-2020)

Tariff Actions:

· March 2018: 25% tariffs on steel imports, 10% on aluminum

· July 2018: 25% tariffs on $34 billion of Chinese goods

· August 2018: 25% tariffs on additional $16 billion of Chinese goods

· September 2018: 10% tariffs on $200 billion of Chinese goods

· May 2019: Increase from 10% to 25% on the $200 billion of goods

USD Impact:

· Initial strengthening: The Dollar Index (DXY) rose from around 89 in January 2018 to 97 by December 2018 (approximately 9% increase)

· The USD strengthened against the Chinese yuan from 6.3 CNY/USD to nearly 7.0 CNY/USD

· The dollar's appreciation was driven partly by a "flight to safety" amid global trade uncertainty

· Trade tensions also contributed to the Federal Reserve slowing its rate hike cycle, which eventually limited the dollar's rise

Steel and Aluminum Tariffs (2018)

Tariff Actions:

· March 2018: 25% tariffs on steel and 10% tariffs on aluminum imports from various countries

· Initially included allies such as the EU, Canada, and Mexico, though some exemptions were later granted

USD Impact:

· Short-term boost: The dollar strengthened by approximately 2-3% in the month following the announcement

· The DXY index climbed from around 90 to 92.5

· The USD gained particularly against currencies of major steel exporters like Canada, with USD/CAD rising from 1.28 to 1.31

· However, as allies announced retaliatory measures, dollar gains slowed

Section 301 Tariffs on European Union (Airbus Dispute, 2019)

Tariff Actions:

· October 2019: 10% tariffs on European aircraft and 25% tariffs on various EU products (wine, cheese, agricultural products) worth $7.5 billion annually

· This was authorized by the WTO in response to illegal subsidies to Airbus

USD Impact:

· Modest strengthening against the euro: EUR/USD moved from about 1.12 to 1.09 over the following weeks

· Limited overall impact on the broader DXY as markets were more focused on Fed policy

· The impact was smaller than the China tariffs due to the more targeted nature and lower total value

Solar Panel and Washing Machine Tariffs (January 2018)

Tariff Actions:

· January 2018: 30% tariffs on imported solar panels and 20-50% on washing machines

USD Impact:

· Minimal direct impact on USD as these were relatively narrow tariffs

· These measures served as a prelude to the broader tariff actions that would follow

· The dollar remained relatively stable in the weeks immediately following these specific tariffs

US Tariffs on Chinese EVs and Critical Minerals (2024)

Tariff Actions:

· May 2024: Quadrupling tariffs on Chinese electric vehicles from 25% to 100%

· Increased tariffs on Chinese semiconductors, batteries, and critical minerals

USD Impact:

· Short-term modest strengthening: The DXY moved up by about 0.5% in the week following the announcement

· Limited impact as markets had largely anticipated these measures

· Effect was overshadowed by broader macroeconomic factors, particularly Fed policy expectations

 

 

Key Patterns in USD Response to US Tariffs

1. Initial Strengthening : Almost all significant US tariff actions have led to short-term USD appreciation, particularly against the currencies of targeted countries.
2. Diminishing Returns : Each successive round of tariffs during the 2018-2020 trade war had a smaller positive impact on the dollar, as markets increasingly priced in trade tensions.
3. Policy Offset : The economic uncertainty created by tariffs often led to more accommodative Fed policy expectations, which eventually counteracted some of the dollar's tariff-driven strength.
4. Differentiated Impact :

· Higher impact from broad-based tariffs (China trade war)

· Lower impact from targeted, sector-specific tariffs (solar panels, EU goods)

· Compounding effect when combined with other dollar-positive factors

     5. Correlation with Trade Deficit Changes : When tariffs demonstrably reduced the US trade deficit (temporarily), the dollar strengthened more significantly.

 

So, what the USD Index is actually likely to do here is to become stronger.

Does it make sense from the technical point of view?

Yes! The invalidation of the move below the 61.8% Fibonacci retracement level is a classic buy signal. This, plus the tariffs’ real implications for the USDX creates a very bullish picture for the latter.

This, in turn, is likely to have a profoundly bearish effect on the prices of copper, stocks (S&P 500) and – most importantly – precious metals (and miners!).

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Thank you.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief