Copper prices have rallied sharply in recent weeks. In particular, the US (COMEX) price rose 7.3% last week, and is up 16% since its late July lows, fig 1. As such it’s now approaching the top of its recent uptrend channel, which has been forming over the past three years (fig 1).
In mid-September we laid out the case for further gains in the copper price (see 15th Sept Market Positioning: “Copper: Ready to Run Again?”). The key question now, therefore, is: How high can copper go? It’s only 4.7% below its next key resistance level (the top of its trend line). Will it break higher? Somewhat troublingly, in that respect, a number of our medium term copper indicators have moved back to SELL; sentiment readings are bullish (a contrarian SELL signal); and, more generally, signs of froth and exuberance have been emerging in global financial markets in recent weeks.
Having said that, and while some near term giveback is plausible, ‘long copper’ is not an especially crowded trade in portfolios (e.g. compared to last year, see fig 4), while the SELL message from our copper models is not broad based (some models are still mid-range, e.g. see fig 3). Added to which, the macro case for further copper upside remains compelling. US, Chinese, and other global central banks are in the midst of rate cutting cycles. Increasingly, that monetary stimulus should generate stronger activity in key cyclically sensitive sectors (global manufacturing, housing, power, and so on). A tightening of copper supply and demand fundamentals, therefore, is likely, and should underpin the bull market in copper. Other key factors are also bullish for copper, including the ‘electrification theme’ and China’s rapid build out of renewable energy infrastructure (and strong investment growth in the power grid, see fig 2).
Fig 1: Copper futures (COMEX 1st quarterly position, US$/lb) with key moving averages
Fig 2: Chinese electric power grid investment spending (Y-o-Y %)
Fig 3: Copper medium term technical scoring system vs. copper price (USD/lb)
Fig 4: Copper net speculative positioning vs. copper price
