full of sound and fury, Signifying nothing

Gold for the splashy headlines, copper for the serious conversation

You CNBC-lovers keep talking gold if you like. Gold will be fine (eventually) and is not going away, but IKN repeats the message about the real worry in the metals world today:

Here’s the gold/copper ratio for the last five years. You think that 18 month trend is bad for gold? Or perhaps it’s bad for copper? Yup, you got it, they’re getting you to look in the wrong place.

Copper is the real money and copper’s got plenty of downside left. That book talking over at Salman Partners this week isn’t going to change the cruel reality.

I’d rather hold Louis James’ best buy pick than copper.

UPDATE 1pm local time: Having said his humble piece pre-opening bell today, your humble scribe thanks reader ‘N’ who sends along Goldman Sachs’ view on copper via its July 22nd of the regular ‘Metal Detector’ letter. To give an idea on The Vampire Squid’s take, here’s the front cover blurb:

Substantially downgrading our medium to long-term forecastsThough we have been bearish on copper on a 12-mo forward basis for the past two and a half years, we have maintained a more bullish medium to long-term stance on the assumption of Chinese copper demand growth of 4% per annum and a major slowing in supply growth around 2017/2018. In this piece we substantially lower our short, medium, and long-term copper price forecasts, on the back of lower Chinese copper demand growth forecasts (we have been highlighting that the risk has been skewed to the downside for some time), increased conviction in copper supply growth over the next three years, and less conservative assumptions regarding mining cost deflation in dollar terms. 

We now forecast 3/6/12-mo prices of $5,200/t, $4,800/t, $4,800/t, and we target $4,500/t by the end of 2016, 20% below spot prices and more than 30% below consensus. Our new 2017 and 2018 price forecasts are $4,500/t (from $7,000/t and $8,000/t respectively), with the price eventually forecast to rise back above marginal cost by 2020, to $5,500/t, as the market adjusts to a 7-year bear market cycle (2011-2018). Our new long-term forecast, from 2021, is $5,000/t in $2015 terms (from $6,000/t). We see the risks to these forecasts as skewed to the downside during October-March 2015/16 and 2016/17 – periods associated with seasonal ‘visible’ inventory builds. 

The 3D’s of macro combine with bearish copper ‘micro’Specifically, we see the 3D’s of ‘macro’ – Divergence, Deflation, and Deleveraging – as the key bearish macro drivers (please see Commodity Watch, July 8, 2015, for details) placing substantial downward pressure on Chinese demand growth and global production costs over the medium to long term. Combined with a bearish outlook for the copper ‘micro’ – a high conviction forecast in an acceleration of mine supply growth over the next 6-18 months and copper’s high exposure to weakness in late China property cycle construction completions – it is, in our view, highly likely that the 4-year trend decline in copper prices is set to continue through at least 2018. 

As such, we strongly recommend producers increase the hedging of their copper exposure, and investors either reduce long exposure or take out long-dated short exposures in copper.

For the record, U$5,200/tonne = U$2.36/lb and U$4,500/tonne = U$2.04/lb. Also for the record, IKN doesn’t find those numbers difficult to swallow.

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