By Jim Williams
Last week we saw copper prices bounce back slightly after the Chinese Lunar New Year Holiday. It’s now been a full week of trading later and the price of the red metal rocketed Monday to levels we haven’t seen in almost a month!
The markets took a slight hit on Tuesday based on economic data out of the states, but the price is still a little more than a dime higher than the $2 level.
Helping boost the price to start the week was an announcement Monday by the Chinese government that it will reduce deed and business taxes for home buyers. You may recall, less than stellar property sales in China had an extremely negative effect on the price of copper last year.
Investors are keeping an eye on China – as they always do – as the Chinese government is expected to announce more stimulus measures later this week. Experts are hopeful copper will be one of the key topics addressed.
Frequent contributor, and Seeking Alpha columnist, Andrew Hecht points out in a recent article that there are four reasons why copper is due for a rally.
Reason 1: Other Commodity Action
“We have seen some real volatility across all commodities thus far in 2016. We have also seen a lot of divergence from historical norms in terms of value differences between various commodities. This has been a year of volatility and surprises. While crude oil is down over 14% as of last Friday, the price of gold is up by almost 16% on the year. While silver has gained over 11%, copper is down by over 2%. On a relative value basis, copper has the potential to recover and perhaps the best argument is the current technical state of the copper futures market.”
Reason 2: Technical
“Strong technical resistance is way above the market at around $2.96 per pound, the level that copper broke down from in late 2014 and May 2015. This means that copper can trade to almost $3 and not destroy the pattern of lower highs and lower lows. In other words, there is a lot of room for a recovery rally in copper right now.”
Reason 3: Seasonal Trends
“Copper has a tendency to move to lows late in the year, usually in December. It also tends to peak during April or May each year. That is because inventories build late in the year and the building construction season starts in the spring season. At the same time, automobile manufacturers begin preparations for the new car model year, which begins in late summer. Therefore, demand tends to pick up in the weeks ahead at a time where the technicals for copper are looking interesting.”
Reason 4: Interest Rates and China
“The U.S. Fed raised the short-term Fed Funds rate for the first time in nine years last December. This likely put additional pressure on the price of copper, which was already weak. However, the prospects for future interest rate rises in the U.S. have dimmed due to stock market volatility and worries about contagion from other economies around the world.
When it comes to China, 2015 has taught us to expect nothing but bad economic news from the Asian nation. It has been a long time since we have heard anything positive from that part of the world. However, the myriad stimulative measures applied by the government will eventually have some effect on the economy. When that good news does come, the price of copper is likely to lurch higher.”
Hecht goes into far greater detail on all four reasons, as well as talking about the copper bear in his article. You can read it here. You can also follow Andrew on Twitter.
We will keep an eye on any news out of China this week and report it here next week.
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