Copper has rallied almost 6% in the last few weeks with a 1.25% surge today sending the 'economic' metal back to near 4-month highs. This must means demand is picking up, right? This must mean the world is ok, right? Chatter is that this morning's home sales 'noise' surprise spike was the catalyst but it appears much more likely that a combination of a continued squeeze of a very-extended spec short position and the ongoing unwind of China's commodity-finance-deals is the real catalyst [5]. As the market comes to terms with synthetic demand (CCFD unwinds buying back hedges) dominating any excess supply in the spot market, futures positioning still has more room to go.
Copper is surging today...
[6]
Copper short positioning has tumbled since the Qingdao probe was admitted to...
[7]
Which makes sense as Goldman suggest below... [5]
Goldman
concludes that "an unwind of Chinese commodity financing deals would
likely result in an increase in availability of physical inventory
(physical selling), and an increase in futures buying (buying back the
hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.
[8]
Of course, we assume that no less renowned trader than Dennis Gartman has unwound his short copper trade already at a major gain [9].
* * *
The market's shift appear to point to the fact that - just as in the case of the gold - the synthetic market for copper (futures/forwards) is dominant in the pricing structure for the metal (as opposed to goldman's hope that the spot excess supply would dominate). Although they have been right that near-month spot excess supply has crushed the commodity curve...
[10]
So once again - this 'market' signalling is anything but a sign that growth is back; merely speculative shorts/hedges being blown out and a fractional ponzi lending scheme unwinding in China.
Charts: Bloomberg
