According to the US Geological Survey, copper's top five end users are building construction, being the largest market, followed by electronics and electronic products, transportation, industrial machinery, and consumer and general products. Copper is one of the oldest metals ever used and has been one of the essential materials in the development of civilization.
Copper is an industrial metal, unlike the gold market known for jewelry making. Over time copper has acquired the nickname Dr. Copper due to its uncanny accuracy in diagnosing the economy's health. And with the housing market playing a significant role in our economies, copper price trends are perceived as a leading economic indicator.
Copper Performance
It may appear that gold has increased tremendously more in the short term, but the macro view still reveals a minor percentage increase, the fear of missing out (FOMO) traders are doing their best to increase this return. Over the past 52 weeks, the price of gold has appreciated a meager 1.1%. During this same period, silver is down 2.4%. While both metals are making new highs for 2023, the longer-term performance is still waning. Copper prices are still down an incredible 12.6% for this period.
Fundamental Backdrop
- The inverted yield curve has steepened to levels not seen in the past 20 years
- China is not roaring back like the CCP news would have you believe
- Copper recycling is increasing, so much for fear of running out of the red metal
Inverted Yield Curve
The most popular yield curve spread followed by the Fed is the 3-month Treasury Bill yield and the 10-year Treasury Note yield. No other yield curve has the accuracy in forecasting an upcoming recession as this one.
During recessions, the unemployment rate rises, and consumer confidence weakens. Large purchases are put on hold (home buying, for one) until the economy shows signs of strength and job security increases consumer confidence.
When this yield curve spread inverts, shorter-term rates are higher than longer-term rates. While viewing the following chart, note that the spread is inverted when the line chart closes above 0.00. The most recent inversion occurred in November 2022. A recession occurs approximately 12-18 months later.
China's Economy
Earlier, China announced it would remove its zero-tolerance pandemic restrictions. China hoped this would cause a significant economic expansion creating an instant restart to their weak economy. Their 2022 economic growth was the slowest since 1970. As they are learning, economic expansion is not an overnight event.
Some are comparing China's economy to Japan's. After a profuse housing market bubble, China may be years before they are at pre-pandemic economic levels again. China's slow economic growth will lead to less demand for copper supplies as China previously consumed approximately one-half of the world's copper.
Copper Recycling
An issue supporting the world's supply of copper is that it is 100% recyclable. And not recycled just once, it's one of the few products that repeated recycling does not impact its performance. Some felt that electric vehicles would create a shortage of copper, but recycling should keep the supply levels adequate.
A report from the US Geological Survey shows that up to 60% of all copper sources come from recycled scrap for US copper.
Seasonality of Copper
Source: Moore Research Center, Inc (MRCI)
The above 15-year cash copper seasonal chart illustrates that March usually experiences the year's high prices for copper. From there, the market tends to trend lower into year-end when processors accumulate copper for the Spring building season.
The US has had an impressive housing market for the last few years. But, even though there was more demand for housing, the seasonal pattern stayed consistent with the early Spring season high prices in the copper market.
Comparing copper performance to gold and silver shows that Dr. Copper expects an upcoming recession and that demand for building materials will weaken.
Products to Trade Copper
The standard-size copper contract (HG) is one choice. However, the large contract size (25,000 pounds of copper) requires much more capital than most traders may have. A micro-copper contract (Barchart symbol: QL Exchange symbol: MHG) is available with only 2,500 pounds of copper, exposing traders to less capital risk and requirements. For equity traders, there is an exchange-traded note (ETN) symbol JJC.
Summary
In an article I wrote, "Is Dr. Copper Advising Other Markets To Get Vaccinated?" I discussed how significant the seasonal high for copper tends to be.
The road ahead for our economy appears to be bumpy. With gold and silver rushing to new highs, traders should remember that copper demand comes from strong economies. In contrast, lower interest rates support higher gold prices. Due to less competition from treasury investors, these same lower interest rates will likely reflect a slowing economy, and copper will be challenged to compete with the current returns in gold and silver.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
