Why metal prices stronger on weaker outlook

You might be wondering why copper prices are rallying to new highs at a time when the US economy has never looked sicker. The reason is simply two things:

1. The lag between the US economic outlook and producers ability to forecast it. Producers in China and elsewhere are not the most market-savy people. They are waiting for queues from the market before they reduce output. Even when that point in time comes, they are probably more inclined to reduce prices to stay competitive than to accept a slower rate of output. They want to remain relevant, so they willingly accept falling profit margins.

2. The rising USD-denominated price of commodities. Traders need to hold $US to buyt their commodities because all commodities are transacted in USD. At times like now, when the USD is falling, commodity consumers prefer to hold metal rather than USD on account, because they will actually make money from the transaction, and they will happily trade that position. I suggest that commodity inventories are not falling for some metals like copper because of resilient consumption. Really its just consumers building their inventories to profit from the falling USD. If that is the case, we can expect that consumers will dump copper and other metals at some point.

The question is which point? Well here are some clues:

1. Technical support in the USD - but relative to which currency? Well I guess that could be in the currency of a number of large consumer countries, eg. China, Japan, South Korea. Some of these countries have managed exchange rates, so I'm inclined to think it will be a technical resistance in the metal prices.

2. Technical resistance in the metal price: Copper prices have rallied to new highs. The copper price is currently $US3.93/lb, having reached $US3.97/lb in earlier trading. I would suggest that the $4.00/lb level is going to be a difficult resistance level to break, and thus I am expecting copper prices to be dumped from this level.

3. Stockpile levels of the metals: We might wait for the stockpile levels of the metals to start rising as a queue as to when metal prices have peaked, but I would suggest this is a lagging indicator. Understanding the fundamentals, followed by the price action is the best guide. Of course easier said than done.

I think we can expect copper prices to peak around $US4.00/lb - since its an important psychological level. Interestingly the copper price is almost there (currently $3.93), and the bigger news is that the USD has just reached an important support - 102.36 Yen - last reached on 18th January 2005. You can follow the USD-JPY forex and copper price action yourself at Kitco.
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Andrew Sheldon www.sheldonthinks.com