It’s been a wild month for copper. June began normal enough for the metal, with the front month futures price (HG1) still ~$3.05 where it had traded since early March. Then, out of nowhere, the price surged. Starting June 4, in a matter of days HG1 was just less than $3.30. It was the highest price of the year and very close to a multi-year high.
Inflation hysteria was briefly embraced, though never reaching the same levels of enthusiasm as something like this move would have triggered a few months ago. Apparently, all the fuss was about BHP’s labor problems at its Escondida mine in Chile. Rumors of prolonged unrest maybe even a strike temporarily took hold of Dr. Copper, the potential for significant interruption in supply.
Then, just as quickly, the price surge reversed. Today, copper is lower than when it began the month having sunk underneath $3.00 again for the first time since March 28. If there were Chilean supply problems supporting it on the way up, there are Chinese issues pulling it back down again.
Copper’s price is linked to Chinese factors more than those of any other place on Earth. That makes intuitive sense since China is the place where more stuff gets built. And it’s not strictly an economic relationship, either, for copper is collateral especially in and around Hong Kong ports of entry.
As you can see above, the last HG1 spike wasn’t all that unusual. It hadn’t happened for several months, but since the big move up in September there had been a couple reaching similar proportions. Each time the jump was beaten back. As copper might represent reflation, it’s been tough going for nine months now.
Even as inflation hysteria gripped many places around the world and many markets within them, Dr. Copper has withheld its approval. Like other base commodities, investors were betting on this one metal in 2016 and 2017 as if “globally synchronized growth” might mean something (this time). Unlike some others, however, parts of the copper market seem to have grasped the big message delivered from China in October:
Some are still betting occasionally on an inflation and growth breakout, the happy scenario everyone wants and expects, but since last September there has been a renewed balance of those worrying it’s not any different this time.
It’s not just copper, of course. A similar sideways trend has developed in gold, too. Another former reflation standout, unlike copper gold has been less buoyant exhibiting more forceful uncertainty of late.
The fact that gold has been almost steadily lower since around April 19 cannot be ignored. It’s the same dates for transition from EM currency concern to burgeoning EM currency crisis.
A lot of gold’s participation in something like that has historically been tied to collateral. Gold is a global collateral that serves as an emergency substitute of sorts. It is one part of the modern system in which the negative funding pressures via collateral develop into the traditional views on sagging gold prices – deflation.
