COPPER BREAKING BAD. CAN GOLD KEEP THE FAITH?
By Rohan Clarke, Data Diary
Since the new world order was heralded in by the market naves in March 2009, the commodities complex has been broadly trumpeting the same tune. Whether it’s been due to the destruction of fiat money or the creation of lots of real demand, the trend across most commodity classes has been firmly up.
But the recent ructions in global markets are threatening to derail these broadly held beliefs. Following is a chart of daily copper price with the gold price mapped against it. Note that while copper peaked in early 2011, the gold price has kept pushing to new highs. This perhaps reflects the disconnect between the primal movers for these assets. While copper is expected to preserve it’s value in real terms (the destruction of money meme) – there’s no getting away from the fact that it is an industrial commodity. Gold on the other hand is almost purely a speculative asset – meaning that it is only worth what the marginal buyer is convinced its worth – it has little utility value.
So with the tailwinds from global stimulus nothing but a sweet memory, and the threat to the world order alternating between debt concerns in Europe and the US, and with China pursuing its very own debt funded growth model, maybe it’s not so surprising that copper has been weak. The question is really whether this weakness is a precursor to a deeper correction.
Notably this weakness is broadly matched by declines in the oil price and industrial commodities more generally.
Turning back to gold, it makes you wonder as to whether it can sustain its price strength if the rest of the market is crumpling around it. Certainly, should copper track lower the copper to gold ratio would be plumbing new depths in the absence of a similar move by gold.
> Turning back to gold, it makes you wonder as to whether it can sustain its
> price strength if the rest of the market is crumpling around it.
The last time the market was crumpling under deflationary pressures was Q4 2008. Taking a look at that quarter gives us an indication of what will happen to copper and gold if we get a rerun of that scenario:
http://www.infomine.com/investment/charts.aspx?mv=1&f=f&r=10y&c=cgold.xeur.uoz,ccopper.xeur.uoz#chart
As one can see, in 2008 copper lost a dizzying 66% of its market value, whereas gold didn’t blink. The pattern is similar for other industrial commodities vs. gold.
I compare prices in Euros because the picture is more complex in dollar terms (reversal of the carry trade etc). The results are the same when viewed in Canadian pounds or British pounds.
I don’t know about the US dollar vs. gold in a deflationary scenario. Gold did lose 20% against the dollar in Q4 2008. But when comparing copper vs. gold, especially when viewed in other currencies, I think it’s safe to say that copper can plumb new depths without gold following it.
If Gold is purely speculative, bcause it has no industrial uses, then it will go lower when the need for that spec ends, or when the specs need to raise cash after the last fool has bought.
Copper is close tied to China Building mania. Take a look at that:
http://www.marketwatch.com/story/china-developers-short-of-cash-analyst-2011-09-14
TPC, it is in line with the previous article I send by email.
” it is only worth what the marginal buyer is convinced its worth – it has little utility value”…
So its a fiat currency, only worth what people think its worth? At least it cant be printed, but I wonder why are central banks buying now? I suppose they are loosing faith in the value of fiat currencies. Lets see what happens to gold when the ECB steps in to monetize the whole mess…
I believe MMT suggest that “rational investors” will always have “faith” in a taxed fiat. And so therefore because economic agents are “rational” holding gold as an alternative currency is purely an irrational action and a risky speculative endeavor.
I’m not sure why they believe, accept or have proven that central banks, politicians, individuals and investors (even non-tea party supporters) and corporate interests are “rational”. But if they relax this “rational” assumption, you may come to realize a different view of the monetary system that actually described reality beyond an academic theory.
Ocean,
This wasn’t written by Cullen, to my knowledge Mr. Clarke isn’t an MMTer. You’re putting words in other people’s mouths.
I have read Wray’s Commodity Bubble Thesis which he points to speculative behavior. http://www.levyinstitute.org/pubs/ppb_96.pdf
I’m not sure what part you say I’m misrepresenting please let me know.
Thank you, Ocean, for the interesting link…
I will read Professor Wray’s paper when time permits!
Look at a 10 year chart of copper. THE WORST SENTIMENT IN YEARS and copper is around $3.89.
That’s “breaking bad” eh? Sure, one can see a pullback even to $3.50, BUT SO WHAT!!!???
Articles like these just steel my conviction that I am on the right side of the trade.
US money supply during 2009 and 2010 was about +10%. But in china money supply was +30% and a significant amount of that new (chinese) money has been used for speculating in copper. So, the price of copper WILL come down, especially when Mr. margin starts knocking on door of those speculators. My personal target is $ 1 per pound and that’s about the price of production. And it reached that level in the 4th quarter of 2008.
Your trade works if the $USD breaks lower
COT–say copper going lower.
http://WWW.MACROSTORY.Com
Of course AWF mentioned this to you several moons ago.
“”Destruction of money meme”" ? That would assume that we’re in a inflationary environment and that’s NOT the case. We’re in a deflationary environment and that means that money becomes more worth more.
$1 per pound, eh. I think that’s hilarious. I’ll gladly be on the other side of you the entire time on that trade.
Second that. I’m already on the other side of his US bond play that’s ‘JUST AROUND THE CONRER!!!!!!’ and will continue to be until the Federal Reserve Bank of the United States Of America indicates it has different intentions.
Copper is close to bear confirmation.
1. widening contagno in the futures market(reflects oversupply)
2. Bearish Seasonality
3. Headwind of U.S Dollar uprend.
4. InventoriesRising to 10 month high
5. HG1 at 200 day low first time in 200 days
6. long term copper top copper returns are on average negative 34.87% since 1800-Present after declining 10% afta a 200% rally.
7. AND THIS IS THE MOST IMPORTANT- MY POOL MAN ASKED ME ABOUT AN INVESTMENT-I TOLD HIM IT WAS A PONZI SCHEME-TOLD HIM TO ASK TO GET HIS MONEY BACK AND I BET YOU…YOU WON’T BE ABLE TO. IT WAS A PONZI. 5 MONTHS AGO HE TOLD ME A FRIEND SAID HE SHOULD INVEST IN COPPER. WHAT DID I THINK OF IT. HE DIDN’T LISTEN TO ME AGAIN. HE INVESTED IN COPPER..
Sell you pennies….sell you copper…
Right. When the poolman wants to invest in copper then copper is at or near its peak. Something similar happened in the first months of this year with silver. A lot of folks were interested in silver. And we all know what happened to silver in may of this year.
Willy1 please don’t log in as Willy2. Willy2 never has agreed with me on anything and I have a TPC restaining order against him. Which you just violated again.
To that I read some of your Treasury comments again..and my hands were twitching.
But since you violated the TPC restraining order I have to ask.
How can you say you own treasuries when every piece you ever wrote to me was lecturing me on why they were the worst investment and you were shorting them all of 2011. I’ve said several times you’d be wrong and now you saying you own treasuries? You were mentioning the bond vigalantes..what did they set fire to everyones house but the treasuries you own?
I’m more than willing to communciate with you Willy1 and Willy2 but please take a market call on Treasuries and the price you paid. Do it prior to the move and not after.
I’m not trying to be a jerk but you have really been wrong to treasuries and never given me credit. YOu just keep telling me why they will later do what you say and today is the later of your earlier calls and now you say you own them.
I will call my attorney to lift the TPC TRO….but you just have to give me your today positions. Not 2015 treasury macro call. Help me help us love each other.
Peace my brother willy2..I throught olive branch out to you…it’s your call
Ha!
This thread was about copper, not about Treasuries. And this time I agreed with you. So, it was absolutely NOT meant to rile you up. But your reply suggests you overlooked that.
Willy2
“Honey..I’m not riled up I’m in heat”
We can play this game if you want and I could cut and past this over to the other thread. Since when did you start following protocol. Really Willy2? I can go back to other posts that are off topic or like I said…I can leave this government building head down to another government building get the paperwork head down get my stamp, come back and get approved, then go back to you to show you my stamp that says I’m a real live person so I get an answer.
Remember I do have a TPC Temporary Restraining Order against you. Granted my post which was like…5 pages…you could have filed a TRO against my rant also. But the court only honors mine.
So…you hate treasuries. But after the gains you suddenly own them? you lectured me why the vigalantes would kill us all…but you talked them into saving you? Does your keyboard have forked keys or is it just your toungue?
You and I are like two old guys who bicker…but I am willing to take down my TRO and banter with you when appropriate..but just do this for me.
Tell us the day before you bought JDSU stock sold it in 2000 then bought 5 condos and sold them in 2005 to buy CDS on Mortgages to which you sold April 6 2009 and bought the 5 x long SPY ETF to which you sold April 29 2011. It’s hard to disucss investing when the play is over and the announcer says he wouldn’t have done this or that.
Peace my brother Willy2….I will gladly put down my sword…after you answer this question AND..in the spirit of our relationship you slap me like I just did to you. You are just like me…we need to get the last word in…so give it to me good..then let’s be TPC bickering old friends.
MY TRO is still good until you answer my question though.
I guess this is what makes a market!
As to silver, it’s at $40/oz. Not exactly a nightmarish scenario for all those ponzi investors…
Both gold and copper are in over supply based on production versus consumption. For either market to continue up the speculative buying has to first take out the production surplus, to continue higher it then has to take out producer hedge selling. At some point in time, and there has always been such a point in time, the longs liquidate for what ever reason, and the market eventually cascades down. Thats what markets do, they move in a direction which hurts the majority most.