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• Implications of lower Copper price

• Gold to Silver price ratio• Gold to Oil price ratio

This week…

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General Advice & Risk WarningPlease note that any advice given by Invast staff is deemed to be GENERAL advice, as the information or advice given does not take into account your particular objectives, financial situation or needs.

Therefore at all times you should consider the appropriateness of the advice before you act further.

CFDs and Forex are leveraged products and carry a high level of risk and are not suitable for everyone. You can lose more than your initial deposit so you should ensure CFD and Forex trading meets your investment objectives. We recommend you seek independent advice. Strategies and charts used in this presentation are for example only. You are reminded that past performance is not indicative of future performance.

Invast Financial Services is regulated by ASIC. It's important for you to read and consider the relevant Product Disclosure Statement and Financial Services Guide which contains details of our fees and charges before you decide whether or not to acquire any financial products. These documents are available at www.invast.com.au

Invast Financial Services Pty Ltd ABN: 48 162 400 035. Australian Financial Services Licence No.438 283

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This week we look at the following topics:• Implications of lower Copper price• Gold to Silver price ratio• Gold to Oil price ratio

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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.

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We spoke last week about the fall in the Brent crude price, Chinese pollution problems and protests in Hong Kong as possible indicators for where short term commodity prices are heading. This week our focus is on key technical levels for the medium to long term. If you are thinking about using the current commodities downturn to take strategic positions, our aim this week is to help point you in the right direction in terms of medium to long term prices.

1. Dr Copper and US$3/lb. We made the point that copper was our preferred industrial commodity to trade and have held the view now that US$3/lb copper is a very important long term support level that we think will hold. Each time the copper price holds these levels, the following move is up by around 10% to the next resistance level of around US3.30/lb.

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Chat via www.kitcometals.com showing sport copper prices

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Invast quotes copper futures on its MT4 platform (HGZ4). The first thing to note here is that the futures and spot price will always show a difference when adjusting for the time value of money.

We think US$3/lb should hold again in the coming weeks as a major long term support level and any move below will only be driven by a huge risk to the global financial system – something like a bear market crash or an all-out collapse of the Chinese economy. In the absence of these events, US$3/lb copper is a key support level which the chats about highlight.

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We also look to the supply of copper when forming the view around the US$3/lb support level. One of the best examples is to look at Australian listed copper and gold miner Oz Minerals (OZL). Co-incidentally, OZL was one of our six key stock tips in our 2014 forecast guide. OZL recently announced its quarterly production numbers which highlight the true cost of producing copper at a commercial, world class mine called Prominent Hill in South Australia.

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The numbers to the left show that despite a large fall in fuel prices and cost cutting at OZL mines, the business has a cost price of about US$2.47/lb year to date for producing an ounce of copper. At US$3/lb, the business is making around US$0.50/lb margin for each tonne mined, hardly a large profit when taking into account the huge amounts of capital it takes to commission a mine and the higher than usual required rate of return which investors need for investing in a mining venture.

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If the ‘cost price’ for producing an ounce of copper at one of the largest copper mines in Australia is US$2.47/lb, we find it very difficult to see how the market can price spot copper below US$2/lb for a prolonged period of time without huge mine closures which in turn will reduce supply and support prices.

2. Gold to silver ratio. Again, something which isn’t new to the readers of this publication. We tend to raise the gold to silver ratio at least once every few months and for a very good reason – it remains one of the most traded commodities cross trades particularly with experienced veteran traders. The beauty of the gold to silver ratio is that you don’t necessarily have to get the overall direction of the market right, you just need to get which commodity will outperform the other. The ratio tends to decline when market risk sentiment is large and rise rapidly when fear starts to enter the market. The rationale here is that gold is seen as a “safer” haven play relative to silver which over the past few decades has moved from and industrial commodity into a currency one.

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Gold to silver ratio chart via goldprice.org

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As we write the gold to silver ratio is current at around 72x, slightly below. We feel that the long term average of around 50x will be the key figure to watch over the medium to long term. The ratio has moved from 45x to 72x within the space of three years, the gain representing a move of around 60% despite a fairly flat gold price for most of the past two years. The illustration here highlights way so many traders still prefer to play this trade.

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Going long the gold to silver ratio would involve buying gold and selling silver. Going short is the opposite. Again this is a matter of placing two different trades on Invast’s MT4 platform.

Both spot instruments are highlighted to the left. As the chart above shows, there is a strong propensity for the ratio to reach extreme levels before reverting back to the long term mean at around 50x and so this trade needs to be placed within the appropriate time frame, as indicated by the time axis on the chart. Hence our inclusion for the gold to silver ratio in this week’s discussion which is a focus on medium to long term trades in commodities.

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3. Gold to oil ratio. It wasn’t too long ago where we spoke about this trade. Like the gold to silver ratio, it is a bet on gold relative to the average price of oil. Both commodities have been traded for decades and our sample size is fairly large in order to make an informed judgement. In our prior August discussion, we spoke about this ratio in order to find an implied ratio of where the oil price could go down to. We looked at the gold price and used the long term ratio of 15x to see what the market was implying as the appropriate oil price. Funnily enough, despite being bullish on energy in August, the market was implying a Brent crude price of around US$85 based on the gold price in late August and that is where we find the Brent crude price today.

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Image: Long term gold to oil price chat via incrediblecharts.com

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The extremes between the high of 30x to the low of 8x during the Asian Financial and tech boom collapse is a sign of just how much volatility there could be in this ratio during a short period of time – in that case a few years. The implied move during the 1998-2001 period was in the order of 73% - obviously impacted by the volatility in markets and outright collapse in the gold price after currency fears were addressed. At the moment we feel that the 15x multiple (as of the time of writing) is about close to the last decade average and don’t really have strong inclination for trading the ratio, but we have this firmly on our watch list and will revisit this call if there is a sudden move.

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At the very least, as a commodities trader, we suggest using the gold to oil ratio mean of 15x to determine where each individual commodity could go as a generate rule of thumb.

Using either Brent Crude of WTI is fine, as long as you ensure your past analysis is based on the right denominator. All our analysis here is based on Brent as the underlying oil price denominator. For example a US$100pb stable Brent crude price would imply around US$1500/oz of gold or thereabouts. The current US$85 Brent crude price implies gold at around US$1275/oz where the ratio holds price.

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The top three ratios hold the basis for most liquid and commonly traded commodities. Our aim this week has been to give you a solid medium to long term view. Many traders have access to short term technical indicators but huge wealth by commodities traders like George Soros have been built on taking measured, medium to long term fundamental views based on reversion to mean scenarios.

We’ll go through the past four weeks of Invast Insights commentaries in this week’s webinar. Book your place early, the event is likely to gain significant interest.

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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/resources/webinars.aspx.

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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.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

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Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

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