Copper Trends - 0 views

started by eric Last on 12 Mar 10

#1 eric Last on 12 Mar 10

Copper is often referred to as "Dr. Copper" because of its unique ability to forecast economic trends.

That's a good question, and inquiring minds deserve answers. Here goes:

1. One of the biggest uses of copper is in housing, and housing has clearly fallen off a cliff.
2. Copper went into contango.

In a previous conversation with this friend a few months back, we discussed the idea that the bull in copper would end as soon as copper went into contango. Although I was very aware that much (but not all) of the backwardation had worn off, I did not have a graphical presentation of it.

It seems I am not the only person watching copper.

Copper Trends: Flashback December 2005

Back in December 2005, Sterling's World Report asked the question, "Will Dr. Bernanke Get Along With Dr. Copper?":

"Many traders have affectionately referred to copper as 'Dr. Copper,' because it is considered to be 'the only metal with a Ph.D. in economics.' That is, copper historically has been considered to be an excellent barometer of the overall state of global economic activity because of its widespread use in industrial applications…

"What Dr. Copper is saying right now is that the world economy is booming. As can be seen in [Serling's] Chart 1, the price of copper has nearly tripled since 2001 and is approaching $2.00 a pound. Much of that is attributable to the growth in China, which has created nearly insatiable demand for copper as it upgrades its electric power grid. But a booming housing market in the U.S. and strong growth throughout much of the developed and developing world are also part of the story."

Although copper went on to soar way past $2.00/lb. all the way to well over $4.00/lb. in May 2006, the message from Dr. Copper seems quite different today.

Copper Trends: A Technical Break

We now officially have a break in that symmetrical triangle.

The interesting thing to me is that hardly anyone is taking these trendline breaks seriously, even though there are breaks practically everywhere you look: oil, natural gas, sugar, the CRB itself, and now a technical failure in copper. Yet posts of charts like these on Silicon Investor and other places just bring a big yawn. In fact, in a response to one of my blogs from just a day or so ago, someone used commodity charts to show "current inflation."

Has everyone really forgotten about the lagging effect of 17 consecutive rate hikes? No, not everyone. Brian and I at The Survival Report, along with Greg Weldon and many of the professors on Minyanville, are taking these breaks very seriously. Are the technical breaks in various commodities we see now akin to the technical breaks in JDSU, LU, CSCO, and INTC in 2000 that most disregarded? Right now it is hard to say, but the complacency and buy-the-dip mentality sure seem similar.

Perhaps this is nothing more than a head fake lower on gold, silver, natural gas, crude, gasoline, sugar, and copper. Then again, perhaps the good doctor (along with confirming indicators such as M1 money supply, the inverted yield curve, and housing) is telling us that this patient (the U.S. economy) is very ill. I think you know which way I am betting: the weakness in housing is about ready to spill over into other areas. A consumer-led recession is on its way.

<div class="cArrow"> </div><div class="cContentInner">Copper is often referred to as "Dr. Copper" because of its unique ability to forecast economic trends. That's a good question, and inquiring minds deserve answers. Here goes: 1. One of the biggest uses of copper is in housing, and housing has clearly fallen off a cliff. 2. Copper went into contango. In a previous conversation with this friend a few months back, we discussed the idea that the bull in copper would end as soon as copper went into contango. Although I was very aware that much (but not all) of the backwardation had worn off, I did not have a graphical presentation of it. It seems I am not the only person watching copper. Copper Trends: Flashback December 2005 Back in December 2005, Sterling's World Report asked the question, "Will Dr. Bernanke Get Along With Dr. Copper?": "Many traders have affectionately referred to copper as 'Dr. Copper,' because it is considered to be 'the only metal with a Ph.D. in economics.' That is, copper historically has been considered to be an excellent barometer of the overall state of global economic activity because of its widespread use in industrial applications… "What Dr. Copper is saying right now is that the world economy is booming. As can be seen in [Serling's] Chart 1, the price of copper has nearly tripled since 2001 and is approaching $2.00 a pound. Much of that is attributable to the growth in China, which has created nearly insatiable demand for copper as it upgrades its electric power grid. But a booming housing market in the U.S. and strong growth throughout much of the developed and developing world are also part of the story." Although copper went on to soar way past $2.00/lb. all the way to well over $4.00/lb. in May 2006, the message from Dr. Copper seems quite different today. Copper Trends: A Technical Break We now officially have a break in that symmetrical triangle. The interesting thing to me is that hardly anyone is taking these trendline breaks seriously, even though there are breaks practically everywhere you look: oil, natural gas, sugar, the CRB itself, and now a technical failure in copper. Yet posts of charts like these on Silicon Investor and other places just bring a big yawn. In fact, in a response to one of my blogs from just a day or so ago, someone used commodity charts to show "current inflation." Has everyone really forgotten about the lagging effect of 17 consecutive rate hikes? No, not everyone. Brian and I at The Survival Report, along with Greg Weldon and many of the professors on Minyanville, are taking these breaks very seriously. Are the technical breaks in various commodities we see now akin to the technical breaks in JDSU, LU, CSCO, and INTC in 2000 that most disregarded? Right now it is hard to say, but the complacency and buy-the-dip mentality sure seem similar. Perhaps this is nothing more than a head fake lower on gold, silver, natural gas, crude, gasoline, sugar, and copper. Then again, perhaps the good doctor (along with confirming indicators such as M1 money supply, the inverted yield curve, and housing) is telling us that this patient (the U.S. economy) is very ill. I think you know which way I am betting: the weakness in housing is about ready to spill over into other areas. A consumer-led recession is on its way.</div>

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