Bullish Case For Copper

Copper is a crucial commodity because it is utilized in an enormous variety of applications – from the construction industry to motor vehicles, from household electrical goods to energy transmission. Hence, it is the world’s key industrial metal in terms of both volume and its influence on world markets.

Copper Prices In 2018-2019

Copper prices have been under pressure in the second half of 2018 and most of 2019 primarily due to concerns over the escalating trade dispute between the USA and China as well as the rising U.S. Dollar.

Copper, daily

U.S.-China Trade Deal

Since China remains the world’s biggest copper consumer as it continues its massive infrastructure build, the health of its economy therefore remains an important factor in the outlook for copper. Which is why all eyes are currently on progress with respect to trade negotiations underway between the U.S. and China.

On October 11, Trump announced that China and the United States had reached a tentative agreement for the “first phase” of a trade deal, with China agreeing to buy up to $50 billion in American farm products, and to accept more American financial services in their market, with the United States agreeing to suspend new tariffs scheduled for October 15. The deal was expected to be finalized in the coming weeks.

U.S. Dollar Devaluation

The impact of a strong U.S. dollar is that it makes all commodities – copper included – more expensive with respect to other currencies. Commodities are traded and quoted in the U.S. dollars on the majority of the world’s metal exchanges, so when the value of the U.S. dollar rises, it automatically makes them more expensive for buyers in other currencies that have to convert their currencies – whether it be yuan, yen or whatever – into the U.S. dollars to purchase.

US Dollar, weekly chart

The long-term chart of the U.S. dollar (see above) shows that the American currency hit its long-term resistance in late September 2019. Since the Federal Reserve started to increase its balance sheet again in early September — effectively engaging in a new wave of quantitative easing — this will most likely create significant downward pressure on the U.S. Dollar going forward.

Federal Reserve Balance Sheet

Copper Prices in 2020

Should the U.S. and China finally reach a trade deal and the U.S. Dollar continue to devaluate, conditions will favor higher copper prices in 2020.

Copper, weekly

Commercial Hedgers Are Also Bullish

Whenever I have a bullish hypothesis on a certain commodity, I check the activity of the Commercial Hedgers. These traders are commonly believed to be the “smart money” since they are involved in the day-to-day operations of each commodity. They have an excellent handle on the underlying market, and it typically pays to follow their positions when they reach an extreme. As you can see from the chart below, the net positioning of Commercial Hedgers got very bullish as of late August – early September 2019.

Copper Hedgers Position

How To Play A Copper Rebound

One of the best ways to play a potential copper price rebound is to buy copper miners. The biggest players in this sector are Freeport-McMoran Inc (FCX) and Southern Copper Corporation (SCCO).

When I examine the daily charts of FCX and SCCO, I see bullish formations with price break outs on both charts.

FCX, daily

SCCO, daily

Leave a Reply