Copper

It appears the US has decided to apply a scorched earth policy to China. While we are seeing flashing headlines that the Senate just passed a China currency bill 79 to 19 (we don't know what is in the bill yet), we doubt it will be something that China will be too pleased with, as most likely there will be some language about currency manipulation and/or some such typical politician propaganda. What is more troubling is that the CME just made sure the tens if not hundreds of billions of Chinese copper collateralized Letters of Credit just lost even more value following yet another margin hike in Copper, which raised initial and maintenance margins by 15%. If China perceives US actions as provocative (and it made very clear that US overtures in Taiwan already are), we may just see an 'oopsie' moment tomorrow when the Mainland decides to offload a few billions in US Treasurys. And the cherry on top was a 28.6% margin hike in Platinum: a direct warning to gold and silver longs once again.

People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800—they are freaking out something awful. “Gold has fallen 10%! The world is coming to an end!!!” I myself took a shellacking in gold—...—but copper is what has me worried. Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.  From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.  But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means. What it means for monetary policy.

And there you have it: CME just hiked gold margins by 21%, silver by 16% and copper by 18%. Mystery solved.

Put this in the category of it ain’t over until it is over.

Dr. Copper, that metal with a Ph. D.  in economics, isn’t looking so hot.  In fact, it is at a reasonable risk of breaking down thus highlighting the current risks in the global economy.

They call the red metal “Dr. Copper” because of its uncanny ability to forecast the future direction of the global economy. Well, this year, he has been right again. The sudden sell off in crude has also created some spill over selling in other hard assets. That the long term case for copper is still compelling. (CU), (FCX).

Following various outright margin hikes in commodities such as precious metals and crude, the CME is now moving on to swaps and other interproduct and intraproduct contract pairs. As of a few minutes ago, the CME just hiked the CL intraproduct spreads Tier 1 through 6 for both New and Initial Margins by about 33.3%, and assorted other CL pairings by a lower amount. It also did the same for a variety of RBOB contract intraproduct spreads by a comparable amount. Curiously, intercommodity spreads actually declined between gold, silver and copper pairings by anywhere from 10% and 20%. For now the market appears not to be reacting to this latest margin move by the CME.

Following two consecutive commodity downgrades which killed crude and all commodities, which led many to wonder just how many pictures of Lloyd Blankfein at Scores does Bill Dudley have locked up in his office, the bank, whose primary M.O. is to push inflation, has gone for one more deflationary report, this time cutting the last man, er doctor, standing: copper. From Goldman: "We are pushing out our $11,000/mt target to 2Q2012 and lowering our 2011 year-end copper price target to $9,800/mt from $11,000/mt. Accordingly, we recently closed our long December 2011 copper trade recommendation – first opened on October 4, 2010 – for a gain of $1,872/mt. We are also raising our 3-month forecast to $9,300/mt, and 6-month forecast to $9,600/mt." And with this we can now scratch Scores, and move on to The Bunny Ranch. Incidentally, this means gold and silver are next. You have been warned.

Wondering what just took the carpet from under the commodity complex? Heeeeeere's Goldman.

Two days ago we pointed out the dramatic change in the ratio of copper to gold, which moved at the highest rate of change since June of 2010. Today, the rate of change is even higher at 4.3%. And with copper starting to seriously take on water, a curious observation emerges: is the gold-copper ratio, which on an inverted basis was virtually a tick for tick correlation conjugate for the S&P, now simply a harbinger of where the stock market is headed. All else equal, once the Chinese exuberance dynamics which appear to have stalled out in copper, move to equities (which as Finisair demonstrated yesterday is only a matter of time) we believe, as the attached chart shows, that the fair value of the stock market is about 120 points lower. Since this is a relative comparison, those who do not wish to trade a single series, can put on a pair trade of short the Gold/Copper ratio (predicting it will decline from the current 3.4 - it is shown inverted on the chart below) and short the S&P in expectation of a compression.

As Credit Suisse points out, today the Gold/Copper ratio is up by over 4% to 3.32, which happens to be the biggest one day move since June 29, and confirms that not only the copper run may be over, but that derisking and the flight to safety trade is truly back on. Although one hardly needed to see this chart to come to that conclusion: even as the market continues to expect an announcement from Bernanke that CTRL-P Central (f/k/a the Marriner Eccles building) will start printing crude any minute, the wait may end up being quite protracted. And while gold has not been touched yet, and in fact continues to trade at all time highs, we wish to repeat our warning that should the crunch in the S&P continue (even if it is modest by historic amounts), it is very likely we may see liquidations in HF precious metals holdings considering the HF margin debt position is at virtually all time highs, meaning the toxic spiral of plunging prices and broad deleveraging in advance of margin calls, will lead to a sell off in anything and everything that is not nailed down.

As suggested last night, the escalation in Egypt, together with more riot news out of Yemen, and fear that tomorrow's Syrian "Days of Rage" will live up to their name, Brent Crude has pushed to the $103 psychological barrier (even as the Brent-WTI spread continue to be about $10, much as we speculated previously would be the case for a while). And speaking of psychological barriers, copper just passed a key one after it moved to a record north of $10,000/tonne for the first time "as investors bet that supply shortages and buoyant demand growth this year would keep fuelling a rally."

According to PhysOrg.com, two Italian scientists from the University of Bologna have taken on one of physics' historically most discredited concepts, cold fusion, and have actually succeeded in creating a sustainable reaction. Aside from the major implications of the energy market should this be validated and recreated (an issue that buried the original Cold Fusion discovery by Stanley Pons and Martin Fleishmann), one of the more economically important side effects of this purported rediscovery is that one of the byproducts of the reaction is none other than recently uber-bubbleicious copper. One wonders what the implications for the copper supply and demand curves (and equilibrium price) would be should the reaction documented by Andrea Rossi and Sergio Focardi be proven to not be a hoax. Is modern day alchemy the only thing that can dethrone copper from its historic price highs?