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6 Months Of Gains In Copper Could Continue

Summary
  • Copper has been a bullish beast since March.
  • Inventories are dropping as production issues and Chinese demand empty warehouses.
  • FCX has exploded higher since March.
  • A significant move to the upside in the PICK ETF.
  • Levels to watch in the copper futures market

Copper can be a highly volatile commodity. In 2008, the price of the red metal reached a record high at $4.216 per pound. Before 2005, COMEX copper futures had never traded above $1.6065.

The financial crisis in 2008 caused the price of the red metal to collapse to a low of $1.2475 in seven months. By 2011, governments and central banks’ stimulus that fostered economic growth pushed copper to a higher all-time peak at $4.6495. While the price of copper reflects global economic expansion or contraction, the base metal is highly sensitive to China’s economic conditions. The world’s most populous nation consumes the most copper in the world, along with many of the other nonferrous metals. As the demand side of the fundamental equation, copper rises and falls with the Chinese economy.

In 2020, the global pandemic has impacted copper and other base metal output. At the same time, since the dollar is the pricing mechanism for most commodities, weakness in the US currency since March has been supportive of prices. Moreover, the tidal wave of stimulus and central bank liquidity, which is far higher than in 2008, is stoking inflationary pressures. Over the past six months, copper has made quite a comeback. Freeport-McMoRan (FCX) is a leading copper producer. The iShares MSCI Global Metals & Mining Producers ETF (PICK) holds a portfolio of companies that produce copper and the other base metals that trade on the London Metals Exchange.

Copper has been a bullish beast since March

After falling to its lowest price since June 2016 at $2.05995 in March, the copper market has posted six consecutive months of gains, pushing the red metal back over $3 per pound and to the highest level since June 3, 2018.

Source: CQG

The monthly chart highlights the ascent of the copper price. The total number of open long and short positions in the COMEX copper futures market has been rising with the price since April. Increasing open interest during a price rally is typically a technical validation of a bullish trend in a futures market. Price momentum and relative strength indicators were both rising and heading towards overbought conditions. The metrics on the long-term chart turned higher from March through April 2020. Monthly historical volatility at 26.44% is sitting at the highest level of the year. The next level to watch on the upside is at the late 2017 high of $3.3220 per pound. The most recent high was at $3.0825 on the continuous futures contract.

Inventories are dropping as production issues and Chinese demand empty warehouses

The global pandemic has had a significant impact on copper production in South America. Chile is the world’s leading producer. As of September 11, Chile confirmed 430,535 coronavirus cases with 11,850 fatalities. While the rising price of copper has miners looking to increase output, the decline in copper inventories confirms lower production and increased Chinese demand. China is the leading copper consuming nation worldwide.

Source: Kitco/LME

The chart shows that London Metals Exchange copper inventories declined from over 280,000 metric tons in late May to 74,875 tons as of September 14. The drop of over 73% has supported the rising copper price.

Source: Kitco/CME

Meanwhile, copper stockpiles in COMEX warehouses have declined from almost 90,000 to 82,052 tons or around 8.8% over the past two months.

The decline in copper inventories is a sign of falling production, rising demand, or a combination of the two factors. While dominant market participants can manipulate inventory data, the significant decline in copper stocks appears logical, given the issues facing Chile and other producing nations and the recovery in the Chinese economy.

FCX has exploded higher since March

Freeport-McMoRan is one of the world’s leading copper producers. The company owns or operates mines in North and South America and Indonesia. Aside from copper, FCX also produces gold, molybdenum, silver, and other metals, as well as oil and gas. According to the company’s profile on Yahoo Finance, FCX has proved and probable reserves of 116 billion pounds of copper, 29.6 million ounces of gold, and 3.58 billion pounds of molybdenum. FCX shares tend to magnify the price action in copper on a percentage basis. Copper rose from a low of $2.0595 in March to a high of $3.0825 in September or 49.7%.

Source: CQG

Since mid-March, FCX shares rose from $4.82 to $16.69 or over 246%. Copper and FCX shares rose to the highest prices since June 2016. FCX magnifies the price action in the copper market on the up and downside.

A significant move to the upside in the PICK ETF

The top holdings of the iShares MSCI Global Metals & Mining Producers ETF (PICK) include:

Source: Yahoo Finance

PICK holds over 4% of its net assets in FCX shares but also owns shares of BHP (NYSE:BHP), Rio Tinto (NYSE:RIO), and many other copper producers. PICK has net assets of $186.03 million, trades an average of 128,725 shares each day, and charges a 0.39% expense ratio.

 

Source: Barchart

As the chart illustrates, the PICK ETF moved from $16.01 to $29.02 per share or 81.3% since the mid-March low. PICK outperformed the price action in copper but underperformed FCX over the period.

Levels to watch in the copper futures market

Short-term technical support in copper is at $3 per pound and the mid-August low of $2.7690. Resistance stands at $3.0825 and $3.3220 per pound. If the price action in the copper market from 2008 through 2011 is a model for the red metal over the coming years, we could be on the verge of a long-term breakout to the upside in the red metal. Above the late 2017 high at $3.3220, the December 2013 peak at 3.4445, the February 2012 high at $3.9895, and the 2011 record high of $4.6495 are upside technical targets.

Copper could be preparing to shock the market. The unprecedented levels of liquidity and stimulus and the Fed’s tolerance for rising inflation are bullish for the red metal. A bull market in copper is likely to push FCX and PICK significantly higher from their current levels over the coming months and years.

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