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Tuesday 17 January 2012

Copper Price Signalling Growth


Copper Signalling Growth Ahead

Copper prices are often seen as a leading indicator of global growth, not dissimilar from the relationship between partner and Christmas which states that the earlier your partner asks what you’re getting them for Christmas, the bigger present they expect on the day. If you fudged the latter, don’t ignore current copper prices and read on.

Over the course of 2011 the price of copper fell from over $4 to holding just above $3 per pound, and now sits back at the $3.6 per pound mark. For the record, it fell from the same $4 starting price to just above $1.25 during the GFC. So why is this relevant? Due to copper’s use in electrical wiring and industrial processes the demand for the metal is considered a good indicator of growth, making it most sought after when the Chinese are getting busy and least sought after when the US starts to get busy/overconfident. As this ‘diagram’ illustrates, the current fall in prices may not be entirely attributed to European growth (or lack of), but more the complete lack of faith in their ability to have a productive conversation.

Copper Price Signalling Growth

Despite Europe’s impending recession, the question is ‘will the other 80% of the world grow as well’? The copper price certainly suggests it will, but how about the stock market, which is essentially a measure of individual companies’ growth? The S&P is still relatively unchanged since the start of 2011, but the Shanghai Composite is down 20% and a key resource supplier (Australia) is down 12%. This leads me to think that either the copper bulls are correct in believing Europe’s woes are a small part of the global scene, and the world’s emerging economies plus the US and China will put a strong floor under demand, or the two countries supplying (Australia) and consuming (China) the resources know something else.

Which one you believe is up to you, but I’m with the copper traders. The IMF still predicts emerging market growth will top 4%, and an easing of Chinese monetary policy will put a floor under their GDP growth. Copper got it right in 2009, doubling in price as share markets rebounded in unison, affirming its connection with global growth levels. The copper price itself appears fair – momentum traders will start to take long positions soon, whereas fundamentalists will start to take profits/place shorts as it nears the $4 mark. The S&P is performing like Kimbo Slice (if you don’t know him, google) on steroids, all things considered, so if you believe in their story then start looking at what’s undervalued in the world (don’t say love).

Essentially, if you’re looking for an excuse to be buying up Asian mining stocks, this appears to be as good a time as any. Maybe the US and New Zealand has got it right for once – being the best performing stock markets last year. Trouble is it’s that very fact that makes me so tentative about placing the trade myself.

In the pipeline: Silver – boom or bust?

Bullish on: Global mining stocks (Chinese easing of monetary policy to boost growth and demand)

Bearish on: US 10 yr Treasury Notes (yields too low relative to S&P, will lose safe haven demand)

As always, please leave any questions or comments you have, and if you’re looking for a beginner’s trading guide, try www.tradingpimm.blogspot.com.

2 comments:

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  2. Your blog for copper updates are very useful to read, you can take advice from Epic Research also.

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