Friday, December 10, 2010

Debunking Copper Top: Check Copper-Gold Ratio

Debunking Copper Top: Check Copper-Gold Ratio
December 10, 2010
By:  Marco G.
The author just saw one Seeking Alpha article that purports a rest for Dr. Copper and a second one that purports a coming top for Copper prices.  That leads one to wonder, whether the other authors are aware of quite a few world happenings.
Firstly, J.P. Morgan Chase was reported by the Wall Street Journal on December 7, 2010 to have purchased over half of the inventory of the London Metals Exchanges (LME) warehouses on behalf of their clients. There was concern expressed that this may restrict supplies.  The LME responded that the holdings were covered by their LME rules in terms of being able to be lend back to the market.
Secondly, Friday, December 10th, 2010 was the start of the ETF Securities launch of the world's first copper base metal physically backed exchange traded product.  This will be soon followed by similar trading products from Blackrock and J. P. Morgan.  Speculation was that the previous purchase of copper by JPM was an attempt to front run their upcoming copper fund.
Thirdly, China's monthly copper imports rose unexpectedly 30% in the month of November.  This serves well to allay the concerns about the slowing growth coming from the middle kingdom.  Also, on December 10, 2010, China announced a slower method of bridling in growth with a .5% increase for bank reserves.
Fourthly, Cochilco, Chile's copper think tank is predicting a 3% growth in copper demand for 2011 while supply is only going to grow .7%.  This deficit is seen as driving the copper pricing higher.
Finally, the author checked the Gold:Copper ration to see if my thesis of the coming surge in world markets' growth was insecure?  Following is the chart:

To the author's eyes, there is a coalescing triangular trace from this ratio shown above.  The triangle is marked in pink.  Interestingly, the price ratio has just broken down from the triangle and is circled in green above.  Now charts by themselves do not explain what is going on, the user needs to interpret the price action depicted.
Seeing as Gold has enjoyed a very good rising trend this year, it is a bit unusual to see that copper appears to be rising faster than Gold.  This is depicted by the sloping downwards action of the Gold:Copper ratio. This downward slope is especially apparent since July.  Are we just witnessing the breakout of Copper? 
Understanding the previously mentioned fundamental drivers and seeing the resulting action charted out leads the author to believe that we are witnessing the rise of global commodities and equities markets.

Disclosure: The author is long mining commodities.
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The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.

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