As the new week begins, I thought it might be fun to take a longer look at the recent price trend in copper. You'll note that, as of late, there has been a rather stark divergence from gold and silver.
Let's start with a broad generalization:
- She'll very likely dump you as soon as a better looking guy with more money comes along
Oops. My bad. That's a generalization about broads. What I'm looking for, instead, is a broad generalization...
- Gold = precious metal
- Silver = precious and industrial metal
- Copper = industrial metal
As a group, these three items only share one, major defining characteristic...they are metal. Other than that, they are separate entities with different histories, uses, demand fundamentals etc etc. Don't tell that to the algo WOPRs, though. These machines trade these metals as if they are all the same. Don't believe me? Take a look at the past five years of gold plotted with copper:
Note the correlation from 2009 through the price peaks in August of 2011. Then note the ridiculous 1:1 correlation in the red box. Again, what are the similarities of copper v gold that make the correlation this precise? There are none and this is not just random, either. This is a clear picture of the destruction and distortion that computer-driven markets bring.
Now look, however, at the blue circle and the divergence that has recently appeared and has accelerated over the past six weeks. What do we make of this? Two possible scenarios (both of them good):
1) This is a 25-year, monthly chart. Note that, generally, the copper price line is above the gold price line during metals bull market periods and below the gold line during bear market periods. With copper now "ahead" of gold again, have the metals begun the next phase of their bull market? You know that I've been claiming for months that gold and silver are tracing out massive Double Bottoms from which they will re-start their bull markets in 2014. The recent price action in copper lends me optimism that I will be proven correct:
2) We've been following closely the delivery action in Comex copper. Do you remember what happened in December? Where every previous month in 2013 had seen a vigorous pace of deliveries, ranging from 2,000 contracts to 7,000 contracts, December 2013 saw only 549 even though nearly 6,000 stood at First Notice Day. We attributed this to the massive Spec short position in copper being unable to deliver and thus forced to cover (buy) the contracts back in illiquid conditions. This buying led to a 10% rally in price that has so far held into January. (By the way, this dynamic is continuing as the Jan14 contract still shows 1,500 in open interest but, through Friday, only 42 deliveries.) The result has been this divergence on the metals charts which you can clearly see on the yearly charts below where gold and silver are shown as candlesticks and copper is shown as lines.
On the charts above, really only two things can happen:
- Copper can collapse back down toward 310-320 while gold and silver stay right where they are.
- Copper can hang in there or even extend its rally which, at some point, history informs us will drag gold and silver higher. Already, if the exact 1:1 correlation had been allowed to continue, the current price of copper implies $24 silver and $1400 gold.
So, let's continue to watch the action in ole DrC very closely. Early last week it appeared ready to fall hard toward 320 but it then reversed and is continuing to find the 330 level to be pretty important support. If the rally picks up again and price ever closes ABOVE 340, look out.
Finally, here are you current charts of gold and silver. Price is hanging in there nicely though both metals continue to be repelled from their 50-day moving averages near $1250 and $20.25. Whatever. Just stay patient. Last year was brutal and we all want prices to recover quickly so we can flip a collective finger at all the AGAs. However, major bottoms are not formed overnight and we are in the final stages of completing one which we have been working on for nearly seven months. Waiting just a little while longer isn't going to kill anybody.
Have a great day!