–“Drugs, domestic violence, copper theft and burglary lead the list,” says Orangeburg County interim sheriff Barbara Walters [not THAT Barbara Walters] to The Times and Democrat of South Carolina. She was talking about what’s killing people in South Carolina. And you might be surprised to see copper on the list, mostly since copper is just your normal, self-respecting, malleable, ductile, corrosion resistant industrial metal, located at spot number 29 on the periodic table.
–But copper, it turns out, is a cold blooded killer.
“The one [crime] that has increased almost beyond belief is copper theft,” says Sheriff Barbara. “It’s so much in demand by manufacturers, the price has doubled or more in the past two years. Today’s price, $3.18 a pound, could get higher tomorrow. The thieves watch outdoor machines, old-model cars and collections of electric wire. Often they return to check out the location and number of people who live or work nearby. To them, old copper is future cash; sometimes big cash.”
–The reason “old copper” is “big cash” is that copper futures closed at an all-time closing high in New York trading yesterday at $4.10 a pound. The intra-day high is higher still at $4.28. But it’s not far off. Sheriff Barbara needs to check her prices more carefully.
Copper: The other Red Gold
–There was some disagreement in the office recently about whether copper or iron ore deserves the moniker of “red gold.” It turns out we’ve smacked the label on both at one time or another. Copper turns red when it’s exposed to air. But when it’s first rolled into coils for use in electricity (because of its conductivity) or in plumbing, it’s just a red coppery colour.
–Iron ore, on the other hand, starts of as red dirt before becoming steel. And iron ore is a lot more important to Australia as an export commodity. Exports of iron ore should generate nearly $53.4 billion this year, due to rising prices and rising export volumes, according to the Australian Bureau of Agricultural and Resource Economics (ABARE).
–Exports of refined copper and copper concentrate, on the other hand, are only going to generate $6.5 billion according to ABARE (see page 20). But here’s an important point: the dollar value of Aussie exports of key commodities doesn’t tell you where you can make the most money as an Australian investor.
–In copper’s case, Diggers and Drillers editor Alex Cowie went to Africa to find an Aussie-listed miner digging and drilling a huge deposit. You can read about Alex’s trip here in, “The Kalahari Carve Up.”
–But if you’re a contrarian, should you really trust the prices the market is throwing at you right now? A price should normally tell you exactly where buyers and sellers are finding each other in the exchange for a given good or service. It’s the signal that tells producers what consumers are willing to pay for something.
–But if the price includes a lot of noise in it-garbage pumped in from somewhere else-then instead of communicating useful information to you it might actually be lying to you. And if you act on that deceptive, low-down, good-for-nothing information, you’ll probably lose money.
— The copper move is terrifying and exhilarating. But what is it really telling you? Well the move from $1.25 a pound to over $4 a pound took place during the Bernanke re-flation and the massive Chinese credit expansion via bank lending (another US$1 trillion this year on top of last year’s $1 trillion). Copper’s strength is the U.S. dollar’s weakness, with a strong tail wind from Chinese fixed asset investment.”
–There’s a fundamental aspect to it, of course. The copper supply bottlenecks Alex has documented in Diggers and Drillers are providing support. There’s demand too. China Securities Journal reports that the Chinese government will spend three to four trillion Yuan (or US$451.5 billion to US$602 billion) to expand its railway network in the next five years.
–If you view the emerging world (the BRIICs) as finally decoupling form the developed world (the bankrupt welfare states of Europe and America) then copper tells that story. It’s the story of fixed asset investment in a modern industrial economy and growing domestic consumption. And the story, despite the de-leveraging death spiral of 2008, is basically bullish.
–But let’s not forget investment demand for metals. How much of copper’s rise is being fuelled by investors? With exchange traded funds and similar vehicles, big institutions and retail investors can now bet on higher metals prices by buying shares in a fund that stockpiles those metals.
–It sure seems like a good thing to be able to conveniently bet on (and profit from) higher metals prices without the unlimited exposure you’d get in the futures markets. But are investment flows distorting metals prices to the point that the price isn’t a real price? It’s not telling you the underlying demand…but has instead become the volatile plaything of hot institutional money flows?
–Finally, is there any technical insight into the price action? Four bucks a bound looks like the top of a trading range. For copper to break out of that, something wildly bullish would have to happen (you’d think). For example, the U.S. could announce the settlement of a new colony on the Moon to be built entirely with copper. That might break it out of the range.
–But rather than speculating, what does a real trader say? We put the copper question to Slipstream Trader Murray Dawes. He wrote back not long after. He applied the same theory of price action he uses on Aussie stocks to the copper futures chart you see above.
–“Copper is now testing the last major point of resistance at $4,” Murray says. “A sustained breakout above this level could see a huge impulsive move to the upside in copper. From a long term perspective you could see the last four years trading as a consolidation of the huge rally since 2002, with a break out above the current highs as a continuation of the long term trend.
–“If the Fed is determined to keep printing money then investors will continue to flood into hard assets so this outcome can’t be ignored.” By the way, this is one aspect of Murray’s trading that makes him unique. He understands the big picture. And even more importantly, he knows that if you trade without a big picture view (even if your analytical tools are good), you’ll be flying blind and eventually blow up/crash.
–He concludes that, “The resistance in this area will be very difficult to break and we may see more work done before the level is cleared. A failure back into the range could see a sharp correction towards the Point of Control of the long term distribution at $3.25 but I would expect huge support there. We would need to become wary of this outcome if copper falls below $3.60-$3.70 in the near future.”
–Future cash? Or present losses? Tune in tomorrow and find out!