When copper is all over the news, it’s easy to conjure up copper rabbits. But, research is about being objective. On one side, we have top researchers writing about the copper upside, suggesting: “Forget gold, copper could make money this year. China and the US are the world’s biggest consumers of copper and we’re in a seasonally high-demand period, as factories step up production. Copper, used in houses and autos, can set the pace for other industrial metals such as nickel and tin. The recovery in metals underscores the revival of the global economy. Barclays Capital forecasts a move to more than $8,000 a ton (for copper) in the second quarter. Copper may rise this week, as stronger output figures feed speculation and demand is improving.”
In sum, because demand is high and supply is less, prices will rise. Do you think speculators are just waiting for the demand numbers to come and match it with supply? No, they already did the calculation. And, in case the gap between demand and supply gets filled, how fast do you think prices would readjust? Who decides the valuation figure equivalent to the demand–supply gap? If markets cannot get a hedge right, how do you think they can calculate the valuation figure equivalent to the demand–supply gap? Markets work on thumb rules and these heuristic principles have poor computing abilities. This has been proved.
Copper’s outperformance
I have a few questions to ask the research community and long copper analysts. Do you know since when copper has been outperforming gold? Do you know how much copper has outperformed gold since February 2009? Are you aware of what it means if copper outperforms gold? Is it right to extrapolate the copper upside with nickel and tin strength? Do you track nickel and tin’s relative outperformance against gold?
I can already hear some answers and, yes, those are right. Copper has been outperforming gold since February 2009, delivering 120 per cent over the period. Copper’s outperformance suggests a positive underlying economic growth. Copper’s growth is generally accompanied by growth in stock markets. Gold, on the other side, is a crisis commodity and does not generally grow when stocks are on an up move. And, yes, copper growth also boosts growth of other metals like nickel and tin.
Cautious about copper
The real questions are a bit different. For how long and how much do you think copper can outperform gold? Another 120 per cent for another 12 months? Do you know that just like copper, nickel and tin also outperformed the AIGP (the precious metals index) and were up 60 per cent (December 2009) and 30 per cent (November 2009), respectively.
How long do you think a cycle of outperformance can last between two leading metal assets?
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Is there some quantified data available regarding copper outperformance cycles against gold? Does anything like this exist?
These are hard factual questions. If copper outperforms gold for another 100 per cent (i.e. 200 per cent netted from gold performance), we are headed for an unsustainable bubble on copper, irrespective of what copper does on an absolute basis. Let’s have some expert opinion on metals. How many times in the history of copper has this happened (copper outperforming gold by 200 per cent)?
The answers are pretty obvious.
Markets move from one extreme to the other. We are now in a time when copper has outperformed gold. There has been a similar time when the polarity reversed.
The alpha metals carry numeric ranking. Nickel and tin have already reached the top three in relative performance rankings and copper is immediately below them. After more than 12 months, one-way performance and topping performance cycles, we are more cautious than bullish about copper, tin and nickel outperformance against the precious metals index, irrespective of anything.
We are still running long silver against short copper, platinum and AIGP. Long silver–short gold is up 12 per cent. We are awaiting short (underperforming) signals on nickel and tin against AIGP. The latest alpha metals carry numeric ranking, numeric ranking changes, strategy update, pair tracker and performance cycles. Numeric ranking is based on price performance. This is an objective system, which proves performance is cyclical and copper cannot go to the moon, leaving gold behind. The performance cycle is overstretched in favour of copper outperformance and this should reverse, contrary to popular belief. The best-ranked assets should start under-performing and vice versa.
(The author is a chartered market technician and CEO, Orpheus CAPITALS, a global alternative research firm)