Sunday, November 23, 2008

Copper Update

I've only written about Copper twice this year. the first post, early in August, was great. not only were you informed that Copper was in bad shape, but I briefly alluded to the simultaneous asskicking that Oil, Stocks and the Carry Trades were due to receive. the second post, in September, I'm not likely to feature on a Best-Of Album.

'Red Gold' has been bouncing drifting around the $1.50s for a bit now. I recently looked at the daily chart and what do I notice but one of those wedgie thingies that often form before a trend reversal.

the monthly chart below shows that Copper has come back down to the average price of the last ten years. so the question that we need to ask is whether the recent collapse was just one of those 'reversion to the mean' things, or whether it portends an even more severe and longer lasting 'Dollar Enlargement' then we've so far seen? I, unfortunately, don't have an answer handy for you. to be sure, the Global Asset Deflation has been severe, but what we haven't seen thus far is a Deflation in terms of Monetary Aggregates. without the appearance of the later then extent of the former has limits, but if the latter takes hold then the former may extend without limit.

the Copper/Gold ratio is now lower than it was at the bottom of the last recession. there must be limits to how low this ratio can drop, right? I suppose, but as they say, 'Show Me the Model.' calling the bottom of the ratio means, from what I can tell, calling the bottom in the world economy. and if you can do that you'll be a hero.

to summarize, the short-term price picture of Copper futures shows some hope for a rebound, though that is by no means a given. a close above the down-trend line on the daily chart above would likely signal a bounce of another 50 or 75¢. but a failure to hold up to that lower support line would indicate that the deflation fairy's going stick around for the holidays.

the bigger picture is pretty muddled right now, regardless whether we get a shortish bounce. the Copper/Gold ratio is the chart to watch. and that we will.