Copper

Should I jump on to a moving train? Half of global demand for the red metal is now coming from hedge funds. Friends with warehouses stashed around the country with copper ingots stacked to the ceiling. Next stop: $6 a pound? (CU), (JJC), (ECH), (FCX).

Simon Hunt, founder of Brook Hunt, puts a dent in the dreams of all those who expect to see a continuing surge in copper prices throughout 2011 and further.  The copper specialist, who has since left the firm he founded and is now head of Simon Hunt Strategic Services which specialises in copper, global economics and China, is arguably one of the premier experts on the topic of copper. It therefore behooves the copper bulls to pay attention to his latest interim note which contains "our principal reasons why copper
prices this year won?t live up to the hopes of so many bulls." And his long-term vision is about as scary as they get: "Peak prices
for 2011  will be experienced in the first quarter of the year, if they
have not already been seen. Prices will then fall until around the start
of the fourth quarter, hitting a low of some $5500. Recovery will
follow rising parabolically in 2012 to some $14,000 by the end of next
year.  This will signal the end of the gaming of copper prices. A return to
global recession, deflation and the destruction of large end uses of
copper will see prices crashing to levels long since forgotten - to
under $1500 by 2016. It will be at that point that the real
restructuring of the industry will take place.  Future trend growth
rates for world refined copper consumption will be below 2% a year
implying that marginal producers will be closed down. It  is not a
shortage of supply that will shape the future of copper but a shortage
of required material for furnaces." Full note attached.

If you think Gold's 30% gain last year is impressive, one base metal--Copper--even outshined the precious metal by rallying 33% on the year. After a short cover rally in Dec., looking ahead into 2011, the price direction of copper will likely still hinge on supply, and mostly China demand, but it also depends on a couple of new market factors emerged just within the last year or so.

When a week ago we reported that JP Morgan has denied it owned more than 90% of the copper positions on the LME, we suggested that this could very well mean that Blythe Master's firm could just as easily control 89.999% of the copper and still not misrepresent the truth per that non-commital press release. Turns out our unbridled cynicism was spot on as usual. The Wall Street Journal has just reported that in the copper market "a single trader has reported it owns 80% to 90% of the copper
sitting in London Metal Exchange warehouses, equal to about half of the
world's exchange-registered copper stockpile and worth about $3 billion." Oh and yes, while JP Morgan technically is not singled out, we will be delighted to issue a retraction the second JP Morgan approaches us with a refutation that it is not the trader in question. And while we are at it, we also will repeat our claim that it was indeed JP Morgan that reduced its massive silver position, as per the recent FT article: as above we will immediately issue a retraction and apologize should JPM's legal department contact us that we are wrong on this. Somehow we don't think that will be an issue. And so it is once again made clear that the biggest market manipulating cartel in the world is not only JPM's commodity trading operation, but the "regulators" at the CFTC, who are doing all they can do to delay implementing rules on position limit- a stalling tactic whose sole purpose is to make the life of Jamie Dimon as comfortable as possible while he corners the copper market (and offloads his PM shorts to some "foreign bank"), even if that means the complete collapse in faith in the commodity market. Presumably, this means that Mr. Gensler has received an outsized Christmas gift to assuage his conscience. As for the commodity market, well, just look at what has happened to the stock market now that everyone knows it is nothing but a house of cards scam where a few robots front run each other. We are confident to quite confident tomorrow's ICI report will confirm that 33rd consecutive outflow from domestic equity funds. It is a pity that the same fate will now happen to the commodities market, as everyone tells Gensler to shove his corrupt market, and moves to physical. Frankly, it couldn't happen to a nicer group of so-called regulators.

As Zero Hedge had been claiming for about two weeks now, with volatility in stocks virtually gone due to the fact that nobody trades a market that is nothing more than a policy tool, those chasing vol have had to shift elsewhere, namely FX (the vertigo-inducing EURUSD is one example) and, surprisingly, treasuries. As we speculated, the fact that the world's most "liquid" market can experience 6 sigma shifts in the 2s5s10s butterfly in the span of days (more on that later), is indicative of something very bad developing under the surface. We have a feeling that should stocks continue to be shunned as they have been, and as the MOVE index continues to creep higher, the likelihood of some major wipe out is imminent. It seems that the CME has finally agreed with our line of thinking. Late last night, the CME hiked its margin requirements across pretty much all asset classes. The different options and futures involved in this drastic action were everything from natty, to copper (cough Blythe cough), to palladium, to silver. But most notably the CME both new initial and new maintenance margins on 5,7, 10 and 30 Year IR Swaps, 5,7, 10 and 30 Year Bond Futs, and, of all thing, the 30 Day Fed Fund Futures. If it has gotten so bad that the exchange has to regulate the vol in Fed Funds (the indicator of future inflation), then certainly one or more wheels are about to fall off. As to whether this action will have its typical impact of warding of shorting is unclear. We believe it will merely make fails to delivery increase substantially.

As we reported last weekend, in addition to the now indirect admission from JP Morgan (and to all those who are expecting an official 8K from the firm which opens it up to market manipulation litigation, we can only hope they manage to grow out of their childish naivete soon) that it did in fact have a major silver short position, it has been recently speculated that JPM's monopolistic tentacles have reached out to the copper market, of which JPM is now rumored to control 50% to 80%. Today, we get an official non-admission admission from JP Morgan that it does not in fact own over 90% of the silver market. Well, that's not really useful, as that "admission" says nothing about owning up to a whopping 89.9% of the copper market: a stake which would make JPM the biggest one-man cartel in the history of the industrial metal. Per Reuters: "U.S. investment bank
JPMorgan said it does not hold more than 90 percent of copper stock
warrants in London Metal Exchange warehouses, but declined on Tuesday to
comment on whether it had a smaller position." It also appears that per the LME the position is now no longer "only" 50-80 but has grown to 90%: "A single holder, recently controlling 50-80
percent of copper stocks and cash contracts in London Metal Exchange
warehouses, appears to have raised the position to above 90 percent,
latest data from the world's biggest metals market showed." And for those who wonder why one entity controlling the entire market is not good here is the explanation: "some say it is one of the reasons why copper hit a record high of $9,267.50 a tone on Tuesday." Oddly enough, JP Morgan did comment on the firm's holdings in copper, which it so far has refused to do vis-a-vis its silver position: "A spokesman for JPMorgan, asked by Reuters to
comment on the market talk, said the company did not hold more than 90
percent but declined to comment further." And this is the environment in which the CFTC still obstinately refuses to impose position limits lest it derail the massive profit scheme that one-time or recurring monopoly holdings represent for the big banks.

Copper is often called Dr Copper as the metal is considered a bell-weather for the world economy due to its close correlation to economic growth (used by many industries, copper typically rallies when the world economy is growing)

I don’t know if you have noticed what I have, but lately it appears that people are using Copper as a poor mans currency. I started to notice during the crash of 2008, that copper was being sold in a .999 pure bullion. The photo attached is for a single troy oz of “Fine Copper”. The list price for this copper, as is, was 12 dollars. Think about that for a moment.

Not content with holding the biggest paper short position in silver, JP Morgan is now intent on cornering the copper market, as the monopolist firm stretches its FRBNY-facilitated muscles in an attempt to stem the massive losses incurred via its silver short. As the Telegraph reports, following up on a story of a "rogue" purchaser who bought up $1.5 billion in copper on the LME, "the American investment bank JP Morgan is the mystery trader that grabbed more than half the copper on the London Metal Exchange." This is a huge copper purchase, and represents between 50% and 80% of the 350,000 tonnes in reserves, confirming that JPM is now the dominant manipulator in yet another commodity market. The purchase also pushed the price for immediate delivery to $8,700, the highest since October 2008. It is unclear how China, which is the biggest non-speculative end user, will react to this development, nor whether the CFTC will (ever) take any action against such blatant market manipulation. One thing is certain: the LME will do absolutely nothing: "Diarmuid O'Hegarty, head of compliance, said: "The LME has noted recent
comments about the current circumstances in the copper market. Such
circumstances are not unusual and the exchange is exercising its well
established procedures for maintaining an orderly market." He added that large trades were not a cause for concern because the market's
rules dictate that holders have to lend out a proportion of their stock to
ensure a smooth supply of the metal." And who would possibly assume that JPM may not follow the rules...

They call it "Doctor Copper" because copper pricing is a pretty good indicator of economic health. It's more of a demand metal than gold or silver and hard to fake and there aren't any silly ETFs stockpiling it although China has socked away a full-year's supply, which has given copper a very false sense of demand...

“Dr. Copper”, the only commodity with a PhD in economics, is predicting a decent economic recovery. While demand for American home construction remains in the basement, demand from China is surging, whose own construction industry remains on a tear. Global production has fallen 12% during the first half of this year. The new “monetization” of the red metal. Stashing copper bars in warehouses around the country, expecting the red metal to hit $6/pound within the next three years. (JJC), (DBB), (ECH), (FCX).

The decline of China copper imports in recent months has caused a lot of distress among traders. Much of the focus has been on copper's eventual crash by China's property chock. However, China's property market is not the only game in copper town.

Goldman's Allison Nathan is out tonight with a report that will leave an unpleasant taste in the mouths of growth/BRIC bulls. In an analysis whose key catalyst is a downward revision of demand growth expectations, Goldman materially cuts its short and mid-term forecast prices for key commodities oil and copper. "Commodity markets are generally rebounding strongly off their lows but sentiment remains fragile on European and Chinese concerns and potential signs of slowing positive economic momentum, despite generally healthy macro data and further improvements in commodity fundamentals. These concerns have caused the market to revise down expectations for future growth, and, in turn, discount future commodity supply constraints." Specifically, Goldman has revised its 3 Month oil forecast to $87 from $96 (old forecast can be found here), nat gas unchanged, copper to $6,800 from $8,125, and zinc to $2,000 from $2,600. What is most amusing is the sheer loathing that comes of the page in which Nathan is forced to be constructive on gold. "We see upside risk to our forecast should investor demand continue to support further flows into the gold-ETFs or central banks continue to accumulate gold. For example, if gold-ETF buying were to continue at its current pace for the remainder of the year, we would expect gold prices to rise to $1,400/toz by the end of 2010."

Copper and crude oil are both base essentials heavily reliant upon by economies globally for everyday usage, with no meaningful substitution options. Gold, on the other hand, is not as essential to keep the everyday world running seamlessly, and could conceivably be substituted by other commodities with a change in global monetary standard or people’s perception. From that perspective, I think there are a few recent trends pertaining to crude and copper that are being misinterpreted.

First, Goldman royally raped its clients by losing them a boatload in two sequentially failed EURUSD recommendations (on which the firm, of course, being on the other side of the trade, ended up making a killing). Today the firm is handing out vaseline to clients but not in FX - they are now going after commodities and, specifically, gold. Most relevantly, Goldman is once again starting to accumulate Gold. Three months ago Goldman boosted its forecast price target to $1265/toz in 2010 and $1425/toz in 2011, during which period the firms was likely shorting gold to clients who were buying in expectation of a price hike. Today Goldman has revised its call - no surprise: gold is now expected to drop to $1165 in 2010 and $1350 in 2011. Then again, according to former Goldmanite and current gold "expert" Jeff Christian big banks would never do something as risky and foolish as having a naked short position. So please ignore anything we might have said earlier about GS shorting gold unhedged. Bottom line, clients are now expected to sell their gold to Goldman. Which means Goldman is buying. You do the math.