We have been students of Dr. Copper for a long time over here since it has a track record par excellence. This week the red metal experienced a bout of short covering from speculators who have been steadily pushing it lower for the better part of this year.
Again, at the risk of beating a dead horse here for the umpteenth time, I am on record here as stating the current rally in equities is nothing but a massive Central Bank liquidity induced bubble without the least bit of fundamental underpinning. My reason for this view - Dr. Copper, whom I trust far more than lemming like equity buyers, says "No Deal".
In spite of trillions of dollars in Quantitative Easing (the balance sheet of the Fed is now over $3 TRILLION and rising) the best the Central planners have been able to do is to generate economic "growth" a trifling bit north of 2%! That is astonishing.
Economies globally continue to either experience a slowing in the rate of growth or are barely limping along. The result has been rather lackluster demand for a metal which typically rises in price during periods in which growth is robust.
From a technical standpoint, copper hit a region (noted on the chart) in which it previously experienced a good deal of buying back during the summer of last year. That level extends from $3.10 - $3.00. When prices came into this zone last week buyers surfaced. They did again on a second test of that level this week. So far then support is holding and the market is stabilizing.
Incidentally, the Commitment of Traders report reveals some decent short covering on the part of the hedge funds as price held this zone. Now that we have seen price move higher, the question is whether or not they are going to re-enter this market on the short side and sell it down from this higher level.
Here is what I would watch more than anything else - be that talking heads on the various financial news channels, newsletter writers, etc. - the SUPPORT ZONE in this metal.
If it fails to hold price and copper begins a fresh leg lower, watch out. It will indicate that Central Bank reflationary policies are failing. Now the fools who keep chasing stocks higher and higher will probably care less but more savvy investors will take note of this barometer.
Quite frankly, I would not know what to expect from the Central Banks were this level to give way. Would they be forced to actually increase the level of bond buying? I am not sure. It all depends on whether or not the rest of the commodity world would follow copper lower. Either way, it would signal that deflationary pressures are overcoming Central Bank inflationary efforts.
If it holds, then the odds favor more of a range bound type of trade with prices moving back up some as traders/investors would see economic growth just strong enough to prevent prices from falling any lower but not quite good enough to see this market rocket up. In other words, a sort of uneasy truce between bulls and bears with bears banking on deflationary pressures to prevent sharp rises in price and bulls banking on lots of funny money to grease the tracks of the global economy to prevent any drastic decline in price.
The key point that I take away from all this - Central Banks are playing with fire by their continuing interference into the markets. Adam Smith must be rolling over in his grave somewhere.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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