Smoke From The Copper and Gold Markets

Posted by David Coffin & Eric Coffin, HRA Advisories

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The dollar denominated copper price benefited from a Euro recovery beginning in mid July.  Other base metals also gained from the falling Dollar.  Traders had become more cautious about gold after its long uptick, but some greater comfort with the economy after Europe managed to push back from the brink also helped the brief move into base metals.   However, internal fundamentals are also playing a role copper’s price move.

Warehouse stocks of copper listed at the LME [London Metals Exchange] have continued to decline from February highs.  This decline did slow somewhat when the red metal’s price gain bumped up against the $7500/tonne ($3.40/lb) level in late July.  In Shanghai the July turnover of copper was off by 40% from a year ago and by 7% relative to June, but warehoused copper listings had declined there earlier in the month and have staid at that lower level.  An early August decline brought Comex listed warehouse stocks of copper below 100,000 tonnes.  Since mid March when a surge of copper into the Shanghai listing peeked, the aggregate warehoused copper stocks in the three markets has declined by over 20%.  This was despite projections for a small surplus of new supply.    

The consolidation in copper’s price after it touched $3.40/pound in July leaves it well below the $3.60 post-Crunch peak in April.  Since this is very much a traders’ market there may be some further play in copper on a technical basis.  Copper’s price does look strong compared to pre-Crunch pricing relative to warehouse stocks that were then significantly less than half their current levels.  That still makes us cautious about chasing after the copper price at this level even though, or perhaps because, it is getting more popular in the general press.  We certainly consider that optimism warranted for the medium term, but want to see further decline in its warehouse stocks before expecting copper to tack into the headwinds of a worried economy.  

Copper’s recent popularity has contrasted with gold which seems to be finding more naysayers with each little price dip.  It’s true that Indian retail buying of the yellow metal, which was fully a quarter of gold’s demand for decades, still looks very limp compared to past years.   The current lack of inflation in many economies is also being pinned as a reason to avoid gold.  There is irony in how these two currently tie to each other and to past cycles.

Gold has lost its retail allure in India partly because the price gains for it have been matched by high consumer inflation that has been acerbated by poor harvests on the subcontinent.  A bout of disinflation could help gold demand in India by generating some spare Rupees that could be spent during traditional gold buying for festivals and weddings.  It’s possible that India is simply less interested in the yellow metal as its economy strengthens.  However, gold’s weak retail market has been buffered by a greater investment demand for it in India, and elsewhere.

In the industrialized world the low interest rate environment is being helped by weak consumer inflation.  Inflation is weak because consumer demand has withered in large measure due to concerns about the economic system remaining whole (a far more potent check on inflation than adjusting money supply, as the Japanese could tell you).  Gold investment has grown hugely over the past few years because it is durable, and neutral to the performance of specific economies.  Weak consumer inflation and gold’s price gains due booming investment demand both result from the same pool of concern. 

In a short run warehousing cycle the price of gold and consumer prices generally do rise in tandem, as the cycle matures.  We are however in a secular cycle and gold is being bought as an alternate store of wealth / insurance policy in the industrialized world.  It will take a lot more economic strengthening, and a lot less sovereign debt, before markets push away from the insurance role that gold is playing in wealthy economies.  The yellow metal never stopped playing its insurance role in India and other places were the financial system historically isn’t trusted, but the amount of gold taken up in these less wealthy economies is still very sensitive to price and domestic budgets.  Day to day gold trading may be influenced by assumptions about an historic relationship to inflation, but history can’t be read as a guidebook during this rapid eastward shift of the global economy.  

If you are trying to gauge global inflation we suggest you keep an eye on the red metal rather than the yellow at any rate.  We are entering a long period in which individual supply/demand fundamentals rather than economic stats will focus metal pricing, but Dr. Copper’s price changes will still reflect the broader demand shifts that will have an impact on inflation.  Copper’s supply side is tighter than most other commodities, and trading the metal is after all the origin of all the sophisticated strategies of our moneyed economy.  Keeping on top of the copper market’s internal fundamentals will continue to be very useful to understanding the larger message copper’s price augers.      


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