Beware of the dragon if you trade copper

 
Philip Salter
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COPPER has been rallying on the back of hopes that the politicians of Europe might carve out a plan to avoid the systemic sovereign and banking crisis that threatens the continent. But as important as European salvation is, the linchpin of copper’s price lies thousands of miles away in China.

ENTER THE DRAGON
Metal Bulletin’s editor Alex Harrison, says “copper prices got absolutely savaged in the flight to safety at the start of August, when investors sold on fears that a financial crisis in the Eurozone would sink banks, and impair global growth.” He notes that copper on an official three-month basis at the London Metal Exchange (LME) dropped to $6,810/12 per tonne on 4 October, over $3,000 down on the price on 1 August, when it traded at $9,846/47. It has since moved back to over $7,500 and Harrison thinks “it may have been oversold in the panic.”

The use of copper in electrical wires, roofing, plumbing and industrial machinery makes it is a proxy trade for, or against, global growth. Will Hedden of IG Markets says this can be covered by one word: “China”. Sales trader Hedden sees lots of movements in copper in relation to Chinese data releases, noting that traders who are aware of these are better positioned to take advantage of the moves in this market. This morning’s Chinese third quarter GDP results are a case in point.

Hedden says the recent volatile nature of copper has meant that IG Markets has seen more short-term trading than long. This is a good way to approach the trade, as the daily range on the Comex High Grade contract can often exceed 1,000 points. As such, he advises traders to be wary of their stop loss placement.

UPBEAT ON COPPER
Elliott Winner of Capital Spreads says “copper has been trading in a bullish channel for around a week now, suggesting it is trending upwards.” He thinks on a technical basis there is potential for it to go higher. Harrison thinks it is worth noting that until the sell-off in August, bears have been getting absolutely hammered in this market ever since 2009. Also, Harrison notes: “In the period of currency devaluation that will follow the current debt crisis, previous experience suggests that real assets such as copper are likely to hold their value.”

AN EGGS AND BASKET CASE
That China is the great hope for global economy is demonstrative of the shifting balance in global economic power. But questions remain: is China’s growth sustainable and will internal (principally asset price collapses) or external (principally reduced demand) factors result in a hard economic landing?

A major shock to the Chinese economy would reverberate across the globe, knocking market bulls off their hooves. For better or worse, the world is now reliant on a country run by the Communist Party of China (CPC), and the price of copper is being driven by how much is built by edict from the party and demand from the people.