HardAssetsInvestor

Written by Julian Murdoch  |

October 11, 2010

Copper High

Details

As of Thursday last week, Copper was up 194% since hitting bottom after the crash, and up 14% in the past 6 weeks alone. We haven’t seen prices like this since the end of April. Should investors be paying attention?

As of Thursday last week, Copper was up 194% since hitting bottom after the crash, and up 14% in the past six weeks alone. We haven’t seen prices like this since the end of April. Should investors be paying attention?

• Copper inventories falling
• The dollar support
• Miners vs. metals

Charts like this, showing the price of a tonne of copper on the London Metals Exchange, make investors giddy, and it’s easy to see why. As a long investor, it’s just plain to see prices take flyers like this. But with commodities, we at least have a chance of figuring out what’s causing the run, and make some predictions about sustainability.

Supply
Copper supply and demand are never perfectly counter-correlated, but the reality this time seems to be clearer than normal. Copper supply has been getting tighter in the past few months, with copper inventories dropping to recent lows. The chart below shows copper and the actual worldwide LME stocks.

Copper As An Indicator
How copper is doing is often a good indicator for how the economy is doing. Copper demand is linked to construction (think copper pipes and electrical wires), transportation (electrical systems of cars and trucks) and consumer electronics such as PCs, TVs and cell phones. If consumers are confident about how the economy is going, construction tends to be strong and people spend more on discretionary items. If people are worried about the economy, construction, spending slows and demand drops.

Government policy decisions affect copper prices as well. For example, Shanghai recently introduced measures to slow down their roaring domestic housing market, attempting to slow skyrocketing home prices through increasing down-payment requirements, raising mortgage rates and cutting down on loans for third-home (!) purchases. The ripple affect means less copper demand for construction, and since China is the world’s largest copper user, if the measures work, we could see lower demand.

Dollar Drive
We have inventories falling, and governments around the world making policy decisions that impact demand, but if you want to know what’s underlying copper’s volatility, look at the dollar, or specifically, the dollar index in relation to the price of copper.

A weaker dollar supports commodities priced in dollars, making them cheaper for foreign investors. For the past few months, the two curves have been almost mirror images of one another. And now, the market is speculating that the U.S. Federal Reserve will take measures to stimulate the economy, increasing the supply of dollars in the system.