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November 22, 2005

Penny for SRB's thoughts on copper, Tues., Nov. 22, 2005, 10:03 PM

Copper futures fell today on the COMEX and NYMEX. And if they traded on the AMEX, they would have fallen there to. Traders worldwide are starting to get the picture that there is no rogue trader (Liu Qibin or otherwise) at China's State Reserve Bureau (SRB). Not one without his head on a platter, anyway.

But the big realization I think is that China is not short just November contracts. If the SRB is massively short, it would be spread through the next year or two. In any event, I have to think the country has major physical reserves, enough to meet any contractual issue for November and December.

I decided to do a little reading on copper this evening, and came up with this summary for you.

The big players in the industry are: BHP Billiton ($100 B market cap), Rio Tinto ($65 B), and Phelps Dodge ($12.5 B). Presently these (mostly) copper miners are trading at close to their 52-week highs: BHP ($32.07), RTP ($164.50), and Phelps Dodge ($128.72).

Technically, they look like they are ready to lose about $15-20 B in cap, in the aggregate. It looks that way because of the falling copper price plus the topping RSI in price series for all the miners and the metal. Also the forward prices are lower in the futures than the spot price, which portends lower prices to come.

Here is the 3-month March-06 copper futures contract (COMEX), with comparative strength to BHP, RTP and PD. One quick look at this chart tells me that copper is headed much lower. This picture looks similar to the NY Crude Oil and XOM through the 2nd and 3rd Q-05.

Copper prices dropped a lot today. I think tomorrow will see more of the same.

And that might take the miners down a pence or two.

Hopefully not too much because I don't want that to affect my goldminers too much. But I did see the gold spot price down today along with the copper, so watch for that tomorrow too.

Thankfully, for the gold bulls like me, there is an incredible global momentum that has been building behind gold as a currency for several months now. The issue seems to be crystallizing around the public's skepticism that the U.S. government, in particular, is falsifying the domestic inflation data, and that Wall Street and Big Media are in lock-step on account of cheerleading for America. The result is that the USD is over-priced, which is making gold in foreign currencies an expensive deal.

But this pendulum will swing " as they all do.

Getting back to copper, the price could come off -20 pct and still reflect a relatively strong global economy. So, I think copper and gold could uncouple at this point, or at least pull back at vastly different rates, for a few weeks.

In other words gold might come off 3 pct, while copper drops 20 pct.

But, again, I am throwing out ideas. This is not research.

Longer term " say 2006 " 2008 " I think all the metals will do well compared to financial assets. I do believe the world is in an inflation cycle, which will ultimately take the ratios of commodity prices to financial asset prices back to ratios seen in the 1980's, although not back to the extremes of the 1970's.

In that scenario, I think copper will be priced somewhere in the $2 to $3 range in the next three years, and gold will be over $600, possibly much higher.

Posted by Posted by Bill Cara on November 22, 2005 10:03:45 PM | Category: 10 Energy , Commodities , Gold

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