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The price of copper targets U$5.00/lb

The Comex near-dated futures contract (currently HGH22)

For success in 2022, junior mining traders no longer need worry their heads with the constant, inane blather and puffy NRs from companies that rely on paid pumpers to “get eyeballs” and “social media attention”. The expanding cottage industry of social media parasites has become an unfunny joke, a parody of itself, dozens of self-appointed experts desperate to keep investors interested by promising Great-And-Wonderful-Things to greenhorns ripe for the picking. At the same time, the parasites burn the other end of their candle as they try to attract the attention of dumb exploreco CEOs stupid enough to pay them fat monthly cheques. Stop The Stupid and filter out the noise because, behind the backs of these knownothing charlatans, metals trading has become far more interesting and a real driver of real stock price movements. For examples, nickel and its recent logistics interruptions has caught headlines, zinc is trying to work out its smelter bottleneck quandry and Alu seems to be fighting with Bitcoin over world electricity supply. But the daddy is copper, so its pop above U$4.50/lb this week should now be at the very centre of your radar screen, fellow metalhead.

As the above chart shows, this week was something of a breakout on the technical chart, but that chart also tells us that we’ve been here before so, with that in mind and studiously ignoring the brief July 2021 move, it’s worth considering the reasons behind Dr. Copper’s two recent attempts to make it to U$5.00/lb and why they reverted. Back in May/June 2021, that run came at the top of the larger run from the U$4.00/lb level and you may remember how it was pumped hard by Goldman Sachs at the strategic moment. But the fade came, arriving when China put its Politburo foot down and told the world it wouldn’t pay those levels, a position it could take thanks to a large strategic reserve, as well as stocks in Shanghai non-bonded warehouses (i.e. separate from official SHFE or LME warehouses) that supposedly amounted to around 470,000 metric tonnes of copper. The “China non-bonded” number is always hard to pin down and subject to no end of market hearsay and rumour, but what we do know these days is that it’s dropped considerably and the latest whispers are of a non-bonded total under 100kmt, which is very low. Add that to the scarcity in official SHFE and LME warehouses and, early 2022 re-stock period or not, it’s fair to say China won’t be able to throw much at the market in order to keep copper from running this time around. Then came the October 2021 breakout, which looked fast and powerful right up to the moment when the Fed telegraphed its shift in policy and, from that moment on, it would care more about the inflation side of its dual mandate. When Jay Powell made his tacit admission that he’d got it wrong and inflation wasn’t going to be a “transitory pulse” (or whatever phrase he used), all markets reacted and adjusted and Dr. Copper was no exception, knocked back into the previously established trading range.

Which brings us to today and the latest attempt at a breakout for copper. The Fed rate hike policy is now baked in, even the new and more aggressive assumptions of a taper wrapping up sooner rather than later and a first hike in March, with the dot-plot-watchers assuming another two or three hikes in 2022. However, this week suggests that’s not stopping copper any longer, our nascent breakout says that financial influences on The Good Doctor are waning and what really matters is real-world demand from end-users. The market is now looking past the traditional seasonal re-stocking period and to later in 2022, doing its sums and thinking China needs more copper than it can get. But this time is different, China doesn’t have the same threat of “No, not buying at that price” because its opaque strategic reserves are mostly used up. Recent notable newsflow includes a China that quickly agreed to higher premiums on blister (see the recent Codelco news) and a China that has just agreed to another year of rock-bottom TC/RC deals to keep concentrate moving to their smelters. Also notable, China isn’t dumping stock into Malaysian LME warehouses any longer as there are no bombs left in the arsenal. For sure expect bearish jawbone on copper as the price moves up, but that’s less effective without bullets left in your arsenal (the wall of worry will always exist).

So in high-level strategic terms, this desk believes the Vampire Squid got its call right last year and its only mistake was to be early. We now know US policymakers are willing to take a period of high inflation on the chin as long as it allows GDP growth to continue, with rate hikes that will stay behind the curve for this year. What’s more China agrees, less worried about price inflation and preferring to loosen its own monetary policy in order to keep its own growth model (or bubble, if you China bears insist) alive. So when the world biggest consumer of copper (China) and the world’s biggest producer of money (USA) are on the same page, the equation gets easier: Real economic growth + dollar price inflation = higher prices for copper, the one metal China desperately needs to import. Nobody should expect a direct run to U$5.00/lb and, for what it’s worth and to micromanage unnecessarily, today’s modest correction from the (very briefly touched) U$4.60/lb earlier this week is roughly what traders would what want to see, especially as it started in overnight Asia trading. Also, no counting chickens before they hatch and any chartist would accept a healthy re-trace to U$4.50/lb (or even a little lower) before the next upward pulse. But with those caveats in place, it’s starting to look as though ‘three’s a charm’ for copper and Vampire Squid is going to get its copper targets hit this year. As for me, it’s extremely easy to filter out the inane noise from the increasingly infantile junior world of braindead hype, focus on fundamentals and buy real mining companies with solid operations that will make an absolute coachload of money as copper goes higher.

Bottom line: Be long copper.

4 Comments

    Thanks for sharing your thoughts

    -namaste-

    Reply

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