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.