The theory that Doctor Copper is never wrong about economic fundamentals, inflation, and future price movements for many of the metals be they the base metals or precious metals is somewhat accurate. In fact this morning, Deutsche Bank warned of every metalheads wet dream based on copper’s recent performance:
In this story from Big Go Finance, the summation of what they proposed was as follows:
In his latest analysis, Ghali notes that the copper market can no longer withstand multiple simultaneous pressures, including continued U.S. stockpiling, additional restocking demand, significant disruptions to refined copper supply, and an unexpectedly tight global supply-demand balance. As available inventories continue to dwindle, the market’s pricing logic is shifting from “demand growth” to “competition for scarce supply,” with copper prices becoming increasingly sensitive to supply-side disruptions.
None of which this observer disagrees with in the very long term.
However, in the short to intermediate time period it would appear that Dr. Copper is going to cut out more than hearts and wallets in error, there seems to be a high probability of a disaster for permabulls in the metals which will cost the supporters dearly. The accepted theory is that due to demand for AI, data centers, military applications, and electric vehicles copper demand will outstrip supply.
Theoretically that sounds ideal in the perfect world.
Unfortunately, Doc Copper occasionally screws up and cuts off the wrong limb leaving investors in pain, bewildered, and unable to function normally.
The most recent example of this behavior was in 2008 when everyone got all bulled up on the gold, silver, oil, and of course copper hype saying this inflationary era was here to stay and the block chain/technology bull would overcome the housing slowdown.
The inflation threat was highlighted in the news with the PPI report while many of us were screaming about a deflationary threat on the horizon. From National Public Radio on August 19, 2008:
The Labor Department’s producer price index saw its biggest jump in 27 years, with prices jumping 1.2 percent in July. The so-called “core rate” excluding food and energy was 0.7. That’s much higher than most economists expected. And it means that high oil prices and rising costs for commodities like steel, copper and other raw materials are finally resulting in higher prices for things like machinery, bicycles and coffee-makers — the stuff that companies and consumers buy.
The emphasis in the excerpt above is this author’s and it highlights the hyperbole often created around inflationary episodes and waves which progressed and receded all through 2007 and 2008. But what did this translate to on the charts? Via StockCharts.com:
For those of you too unwilling, young, or inebriated to remember that episode of history, God knows I didn’t want to, the super spike of inflation heading through the spring and summer of that year was terrifying. People were stealing air conditioners, live power lines from commercial buildings, copper wire from suppliers, etc. Oil was creating real pain for the consumer and those of us who were perpetual gold bugs stayed bullish but cautious. When the peak hit in the summer of 08 the roll over was terrifying and proved those of us warning about a deflationary credit contraction quite correct.
Could it happen again?
Of course it could but that’s a 5% event probability in this current environment.
Unfortunately however, it does not mean that a massive correction or reversion to the mean is also possible as the AI crowd along with the data center pumpers seem to be over promising and under delivering on a daily basis. That brings us to the charts again with a look at today’s action dropping almost to the now banned penny to the 50 day moving average:
After the past 18 months, I do believe Dr. Copper is out of bounces and earth’s magnetic poles are going to pull prices down quite a bit. If the economic slowdown that most normal people are witnessing continues much longer the actual demand destruction highlighted in that 2008 article will repeat with equal intensity into the fourth quarter of this year.
Will this mark the end of Doc Copper’s surgical reign of terror?
Hardly.
Stay tuned for my 2027 predictions in December but in the interim, enjoy a vicious correction in copper and the precious metals which will provide the last buying opportunity of its type before what I believe the epic bull takes everyone for a ride.
