“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"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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Friday, May 2, 2014

What is Copper Up To?

There is an interesting development in copper this week which I feel deserves noting. It pertains to the Commitment of Traders report and the positioning of the hedge fund category.

This category of traders has been net short for some time now. As a matter of fact, the only category of traders that has held the net long interest in the copper market has been the Swap Dealer category. Every other group, the Commercials, the Hedge Funds, the Other Large Reportables and the General Public or Small Spec trader have all been net short.

That changed this past week for the hedge funds. They are, as of Tuesday, now net long in copper. The movement has been consisting primarily of short covering but now new longs are joining in.

Here is a chart of the COT for copper.




Note how the hedge fund positioning at the beginning of this year started out as big net longs only to see them move to the short side of the market in February. They were briefly long again for a week in late February only to quickly establish a larger short position.

I can tell you that a great deal of this weakness was related to both lackluster home sales here in the US but more importantly, continued weakness in Chinese data. Last month they began covering shorts and they have now, about a month later, moved to a net long exposure once more.

So, we now have the swap dealer and hedge funds on the net long side with the commercials, other large reportables and small specs on the net short side.

Here is the price chart:





You can see that the recovery in copper prices pretty much coincides with the shift by the hedge funds in favor of the long side. Once copper climbed back above $3.00 and held there, funds began covering as the downside appear limited at those levels. That has brought the market up towards $3.12 but weak economic data had limited bullish enthusiasm for the metal. Today was different in the sense that the copper market seemed to read the stronger payroll number as a sign that the US economy was strong enough to keep the price supported above $3.00, in spite of doubts about the vigor of the Chinese economy.

Why do I bring this up? Simple - in my view silver prices are tied to copper prices more so than to gold right now. Hedge funds have been gradually moving to play silver from the short side although they remain as net longs, not by a significant amount however. Thus far, the $19 level has been holding as support for silver. It penetrated that level this week but rebounded today when gold took off on the Ukrainian tensions.

If hedge funds continue to move further towards the net long side of copper, there is a good chance that silver will follow suit. Remember silver needs an improving economy to move higher. During any sort of slow down fears, it is not going to move higher. Those who keep trash talking the US economy and in particular the US equity markets, who yet at the same time expect silver to rally, are at complete odds with themselves, even if they do not realize it.

Silver more so than gold, needs inflation to move strongly higher. It certainly needs something to make it convincingly past the $20 level. Thus far attempts at getting past there have not met with much success.

I am the first to admit that when it comes to silver, its combination of being both an industrial metal and a precious metal to some, make deciphering what it is responding to tricky at times. However, a rising copper price is not going to hurt silver, that is for sure. Let's see if copper can climb past the $3.20 level. If it can do that I would think silver can hold above $20. At this point, the jury is still out however.

If copper succumbs to any further evidence of a slowing China, then it is going to act as an anchor on the silver price.

Each piece of economic data that comes out of both the US and China in the weeks ahead will take on great significance in ascertaining whether or not these metals have a shot at starting an uptrend of any durability. More importantly than the actual data however will be the market reaction to that data.

6 comments:

  1. Thanks for all the updates today, appreciate it.

    China at some point is due to hiccup or deflate to some degree. If the Ukraine gets real hot (seems assured) and China cools off it'll be interesting to see what dynwmic supercedes the other. I guess it would hinge on what degree either situation deteriorated to.
    Also, any type of hostility or provocation between China and Japan will keep gold above $1300 for as long as that situation might simmer. It seems like they're due to test each other out sooner than later over some obscure rocky outcropping in the South China Sea. It's what lies underneath that they're interested in. O-I-L

    The silver/copper you've been mentioning for awhile is interesting. I just looked at today's copper chart and it popped up about $0.05 early this a.m.

    If I could overlay a chart from today showing gold, silver, copper, UST10 and the USD I would....but I can't. :-(
    It would be interesting to see what led what and when.

    ReplyDelete
  2. Interesting article by Koos Jansen over at IGWT...

    Internationalization Renminbi Requires Increase In Gold Reserves

    I present another intriguing translation, this time from an article by Tan Weihuan “China Gold News” Chief Researcher on the internationalization of the renminbi. What I find interesting is that according to the author China or any other of the BRICS countries in the short term are NOT interested in a gold backed currency (I share his opinion). There is a difference between backing and supporting a currency with gold. Backing means a fixed price, for example one gram of gold is one yuan. For China a gold backed renminbi is completely unrealistic at this point because the renminbi is still in it’s infancy – capital controls need to be lifted, full convertibility needs to implemented, etc. Next to the fact that the Chinese would have too little influence over the exchange rate of a gold backed renminbi should it be in full effect any time soon, which is nor desirable.

    However, China has a great interest to support the renminbi with gold, having an x amount of tonnes at the PBOC, to give their currency trust and credibility. This is needed for the renminbi to be accepted worldwide. The euro and the dollar wouldn’t be reserve currencies if they weren’t supported by thousands of tonnes of gold. It’s very clear the Chinese recognize the monetary value of gold and the purpose it serves in financial markets, but they take it one step at a time. For the years to come the schedule of the PBOC is to accumulate gold mainly for the internationalization of the renminbi (compete the US dollar) and to diversify and hedge their exorbitant US dollar reserves. At the same time the Chinese government is stimulating its people to hoard gold for wealth preservation.
    Though I’m convinced gold will officially return into the global monetary system within five to ten years, as all fiat roads are a dead end, in what way remains to be seen. There are many types of gold standards and it also depends if the transition will be led top-down or bottom-up.

    Translated by Soh Tiong Hum.

    Internationalization Renminbi Requires Increase In Gold Reserves

    Author: Tan Weihuan “China Gold News” Chief Researcher | Source: China Gold Network 2014/3/21.

    To internationalize the renminbi increasing gold reserves is a very important condition because it can increase the world’s confidence in the RMB and expand its circulation.
    When central bank governor Zhou Xiaochuan talked about the internationalization of the renminbi (RMB) recently, he pointed out: “Pace and timing of RMB internationalization will not be pre-arranged…making the internationalization of the RMB happen is a long process.” This reflects the country has considered the complexity and difficulty of internationalizing the RMB.
    As we know, the US takes the initiative in global financial markets by imposing the US dollar on the whole world, and greatly benefits from this position. When the financial crisis came, the US escaped by printing money massively yet did not suffer inflation because the Dollar is the main reserve and trade currency in the world.
    Although China holds nearly $4 trillion in foreign exchange reserves and more than a trillion dollars in US Treasury bonds at the moment, the RMB’s influence in the world is very small, not matching China’s position as the world’s second largest economy....cont.
    In Gold We Trust.com

    ReplyDelete
  3. Not buying the short term rise. Gold can still hold for now. Yen is toast. That is all..still trapped in Mary LAND. The noose is loosening however. VIRGINIA LOOKING GOOD.

    ReplyDelete
  4. Fwiw...I just added two lengthy posts at "the cult" thread.

    Consider it or dismiss it but don't kid yourself if the shoe seems like it fits.

    ReplyDelete
  5. I've added my two cents over there as well. There are two perspectives at odds, both can be just as wrong, depending on the timeline.

    ReplyDelete

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