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Why is Copper Melting Down?

Posted by Larry Doyle on May 17, 2010 2:26 PM |

If manufacturing and industrial activity is supposedly picking up in the largest economy in the world, that being the United States, then why is the price of the base metal copper melting down?

Let’s look at a WSJ graph of copper for the last twelve months:


We can witness that copper rebounded strongly during 2009, given the global meltup in virtually every risk-based asset. Copper closed out 2009 at approximately $3.35/lb and then proceeded to melt down in January of this year when markets got hit.

It picked itself up off the scrap heap to make new highs in April, but has since declined by almost 20% over the last month. A 20% move in any asset is significant, but in an economically sensitive material such as copper it is truly meaningful. Copper is down over 6% just during today’s trading. Why?

You don’t think the global economy is truly interconnected? Think again. Developments in the Euro-zone are impacting a host of markets including commodities and specifically copper. Bloomberg takes us inside the copper furnace while highlighting, Copper Tumbles on Slowing Manufacturing, Europe Debt Concerns:

Copper prices plunged the most since February 2009 on mounting signs the global economic recovery is slowing.

Manufacturing in the New York region expanded at a slower pace in May than forecast, a report from the Federal Reserve Bank of New York showed. The euro slid to its lowest level against the dollar since 2006 on concern that growth in the region will decline as Greece, Spain and Portugal struggle to close budget gaps. Copper prices have fallen for five weeks.

“The drop in copper is telling you the global economy is weak, and these sovereign-debt problems could sweep the planet,” said Michael Pento, the chief economist at Delta Global Advisors in Holmdel, New Jersey.

Before today, the metal plunged 13 percent since April 9. The five weeks of declines marked the longest losing streak since October 2009. Futures also have declined as the stronger dollar reduced demand for commodities as alternative assets.

“We attribute most of the selling to a combination of concerns about risk appetite and a strong dollar,” Tobias Merath, Credit Suisse Group AG’s head of commodity research in Zurich, said by telephone. “The debt problems in Greece seem so remote from the copper market, but there is a direct link via banks.”

The economic problems in Greece and throughout the Euro-zone can be contained? Try telling that to people involved in the copper markets. If copper does take out the near term support levels, it does not seem to have meaningful support prior to another 20% decline.

Navigate accordingly.


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