   |
|||
The Psychology of the Copper MarketGary Dorsch Copper is often referred to as the metal with a Ph-D in macro-Economics, since it finds its way into so many industrial applications, including automobiles, appliances, airplanes, pipes, wires, and even computer chips, to mention just a few of its uses. As such, it acts as a top forecaster of where the global economy is heading next, especially China, Asia’s economic locomotive. Copper is a favorite tool for speculators in the commodities markets, given its cyclical nature and volatility. Copper has been on a wild rollercoaster ride over the past several years, famous for its “boom-and-bust” cycles. Gambling on copper’s next major move is always a high stakes bet. But “in the long run,” Jesse Livermore, the world’s most famous trader used to say, “Commodity prices are governed but by one law -- the economic law of demand and supply. The business of the trader in commodities is simply to get facts about the demand and the supply, present and prospective,” he said. “It may be possible to use fictitious arguments for or against a certain trend in a commodity market; but success will be only temporary, for in the end, the facts are bound to prevail, so that a trader gets dividends on study and observation, as he does in a regular business. He can watch and weigh conditions, and he knows as much about it as anyone else. He does not indulge in guesses about a dozen things. It always appealed to me trading in commodities,” Livermore added. However, the copper market wasn’t observing the basic laws of supply and demand in 2009, when it gained 140-percent. Instead, copper dealers found it profitable to focus solely on the demand side, while largely ignoring the supply side of the equation. After-all, “the market value of any commodity is only worth, what the highest bidder is willing to pay.” Nowadays, what matters most is China’s demand for the red-metal, since it single-handedly buys about 35% of the global supply.
Commodity traders are questioning whether Professor Copper has actually earned his college degree in Economics. Copper prices soared by 60% to as high as $7,700 /ton in London in the second half of 2009, despite a simultaneous build-up of supply in warehouses in London and Shanghai’s Futures Exchange. Typically, rising inventories are a sign of supply outstripping demand and is taken as a bearish signal for prices. Yet the build-up of supply couldn’t put a dent in copper’s mettle. Copper traders said the bullish view was justified, because of a new phenomenon, called “contango financing,” in which the warehousing of base metals, and the financing of miners, has become increasingly intertwined. Investment bankers discovered a new way to earn millions of dollars, by buying the metal cheaply in the cash market, and selling it at higher prices in the forward market, - thus earning the difference. Much of the copper stored in LME warehouses was linked to “contango financing,” and was already earmarked for future delivery to bona-fide end-users.
Copper supplies in Shanghai warehouses were also growing rapidly, hitting a six-year high of 188,000-tons in April. Yet mounting supply couldn’t deter the red-metal’s explosive surge to 63,300-yuan /ton. Instead, the increasing supply of copper in Chinese warehouses appears to be acting like an indicator of the amount of open interest in the metal, by speculators betting on strong demand. China bought 3.9-million tons of copper in the first 11-months of 2009, up 67% from a year earlier, to feed the Politburo’s $586-billion spending spree on infrastructure projects. However, copper prices began to turn sharply lower in April and May, linked to worries about the Euro zone’s debt crisis, and a gutsy decision by the People’s Bank of China (PBoC), to lift reserve ratios for the country’s largest banks to 17-percent of deposits. In addition, the PBoC has drained nearly 1-trillion yuan out of the Shanghai money market, through open market operations. Speculators began to dump the red-metal into the cash market, and the supply of copper held in local warehouses began to fall to 139,300-tons last week. On June 10th, the Chinese authorities revealed to the public what many dealers already knew, - Chinese imports of copper had fallen 9.1% in May to 436,345-tons, after a monthly fall of 4.4% in April. Beijing wasn’t interested in stockpiling the red-metal, at prices above 52,000-yuan /ton. As Jesse Livermore used to say, “The market will tell the speculator when he is wrong, because he is losing money. When he first realizes he is wrong, it’s the time to clear out, take his losses, study the record to determine the cause of his error, and await the next big opportunity. Chances are that you will not become acquainted with that reason until some time in the future, when it is too late to act on it profitably,” he said.
First Cracks in the Copper rally The parabolic rally in the copper market began to show the first signs of fatigue on Jan 11th when Chile’s mining chief Santiago Gonzalez warned that copper prices could see an “important” downward correction. “We are worried that stock levels are climbing higher. We are at 700,000-tons at the moment, while prices remain high. This means that at any minute we could see a violent change and prices could fall,” he warned. Gonzalez noted that Chile’s state-run Codelco, the world’s top miner of copper, had just reached a record-high output of over 1.7-million tons in 2009. Gonzalez’s crystal ball had the benefit of lady luck. Two-days later, the People’s Bank of China (PBoC) shocked the world markets, by suddenly shifting gears to “Quantitative Tightening (QT), or hiking bank reserve ratios a quarter-point to 16%, effectively draining 300-billion yuan out of the Shanghai money markets. The PBoC’s shift to QT was prompted by a surge in bank lending that was flooding the economy with yuan, inflating a bubble in real estate, and risking a surge in inflation. The Jan 13th hike in bank reserve ratios was the first of three PBoC tightening moves that eventually lifted the ratio to 17% on May 3rd. The copper market remained defiant however, in January, February and March. Copper flexed its muscles for one last fling to $8,025 /tons on April 12th. China’s economy was booming at a 12% annualized clip, and few traders could conceive of a bearish reason to sell the red-metal, beyond the inclination to grab profits.
“A trend in motion will stay in motion, until some major outside force, knocks it off its course.” Finally, King Copper tumbled more than 20% in a span of two months, - its biggest sustained loss since the height of the global financial crisis in late 2008, after receiving a powerful jolt from a thinly traded market linked to Greek bonds, called credit default swaps (CDS), - largely absent from traders’ radar screens. Traders in the volatile CDS markets had exposed the truth about Greece, - that it’s technically insolvent, and can’t repay its €300-billion of debt, without a bailout. When S&P downgraded Greece’s bonds by three-notches to BB+, or junk status on April 27th, Greek bond 2-year yields soared to 26-percent. The copper market began to crumble in a knee-jerk reaction. European banks hold $272-billion in Greek public and private debt, and the extreme volatility in the Greek bond and CDS markets sent a signal to copper traders that it was time to “sell now, and ask questions later.” To read the rest of this article, click on the hyper-link below: http://sirchartsalot.com/article.php?id=136 ### Gary Dorsch 321gold Ltd |
