DJN BARRON'S: Commodities Corner -- Consulting Dr. Copper
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Speculators Buy Metal As A Bet On Recovery
Amid the gloom of anemic corporate earnings and bearish sentiment about the
global economy, one commodity is performing surprisingly well -- copper.
The metal has climbed over 9% since early October despite U.S. indicators
that suggest economic growth is hesitant and patchy at best.
And with the fundamental supply and demand factors for the metal little
changed over the same period, some observers feel the rally in copper prices
is a sign that the global economy is on the road to recovery.
They view the metal as a strong indicator of economic health and prove the
point by noting the historical correlation between copper prices and moves
both upward and downward in the equity markets. Indeed, the October rally for
the metal paralleled a jump in the Dow Jones Industrial Average of around 15%.
Copper speculators have "definitely become more bullish," says Robin Bhar,
an analyst at Standard Bank in London. "They seem to feel that maybe we've
seen the worst of the slowdown and are probably factoring in a cut in interest
rates."
Some analysts are not convinced copper is a leading indicator of economic
health, but most agree the metal continues to offer a realistic reflection of
sentiment in the investment community. The reason: an increasing involvement
of investment funds in metal-futures trading. The funds use copper and other
base metals as mediums for speculation.
The funds' trading strategy is driven largely by their expectations for the
economy. They work on the theory that a stronger economy will trigger more
demand for metals, which are used mainly in industrial processes.
Because the funds now account for such a large percentage of trade on the
metal- futures markets, any change in economic sentiment is mirrored in the
metal price.
Analysts attribute the steady slide in copper prices since September 2000 to
selling by funds, well ahead of the emergence of the most obvious signs that
global economic growth was contracting.
So now, with funds building long positions and copper prices rising despite
mediocre U.S. economic data, analysts are asking if the funds are once again
ahead of the game.
Indeed, their involvement in the October price rally is exposed through
recent Commitments of Traders reports from the Commodity Futures Trading
Commission. Large speculative funds held a net long exposure of 15,000 Comex
contracts on Nov. 8, compared with a net short position of around 20,000
contracts at the beginning of October.
Whether or not the move to a positive stance for copper is justified,
traders are unable to fight the overwhelming market power held by the funds,
even if they believe the fundamentals don't warrant such a strong price jump.
"It is probably too soon [for copper to rally] but you can't go against the
trend at the moment," says Maqsood Ahmed, analyst at Credit Lyonnais Rouse in
London. "You would need very deep pockets to fight the funds, so for now it
seems best to go with the flow."
Because of this, banks, smaller speculators and trade houses will back the
rally and offer further momentum to any upward move.
But Bhar says the gains during October could have been more exaggerated had
the threat of war against Iraq not been present.
"People are still concerned with war," he says, adding that the $1,600 a ton
price (at the London Metal Exchange) could be broken if peace was assured. The
$1,600 price equates to 72.50 cents a pound at the Comex division of the New
York Mercantile Exchange.
Although Iraq has said it will accept the United Nations' resolution and has
said it will allow unconditional access to the country by weapons inspectors,
the threat of war still hangs over the copper market and the economy.
Resistance at $1,600 a ton has held strong over the last few weeks but given
that this is an important technical resistance level, any upward move in the
price break would likely trigger another bout of fund buying and a sharp price
climb. But as the fund dominance of the copper market continues, only the
accompaniment of a brighter economic outlook will ensure lasting gains.
"If the funds take a shine to this market we have the potential to hit
$2,000 a ton in a very short space of time," says one LME dealer. "They are in
the driving seat and everyone's waiting to see what they do."
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Daivd Elliott is a reporter with the OsterDowJones Commodity News in London.
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