Copper - What Is On The Cards?

On September 18, 2018 I wrote a short piece on copper. At that time I was bullish but the red metal, contrary to my opinion, went slightly up and then entered a pretty long consolidation period. And up to now nothing has changed.

Further, consolidation periods are hard to analyze. However, there are some tools that may help to identify the state of the market during these problematic periods.

In our case - as the chart below shows, since middle September 2018 the copper has been trading in a narrow range of $2.65 – $2.88 per pound (the green rectangle):

Source: Stockcharts

It is a stressful situation for investors and speculators and many of them are wondering what next is on the cards. Let me try to give you a clue using the Commitments of Traders reports. To remind you, these reports disclose the positions held by a few groups of traders involved on the copper futures market. Today I would like to discuss the positions held by the so-called Money Managers (big speculators trading copper futures). Let me divide these traders into two groups: the bulls (Money Managers holding a gross long position in copper futures) and the bears (Money Managers holding a gross short position).

Now, according to the COT reports, between September 18, 2018 and November 17, 2018 (the consolidation period) the bears cut their bearish bets by 15.6 thousand contracts while the bulls increased their position by 14.5 thousand contracts. What does it mean? Well, it looks like the current consolidation period has been used by the bulls to increase their bullish position in copper futures. On the other hand, the bears have retreated losing the initiative on behalf of the bulls.

So the final outcome is as follows: in my opinion, the copper is getting ripe for another leg up. This thesis is additionally supported by a few historical facts. For example, the previous consolidation period (April 2018 – May 2018) looked similarly – the copper prices were flat and the bulls were taking the initiative; then, in June, copper prices started a strong move up.

Last but not least – look at this chart:

Source: Simple Digressions

The chart shows the global stocks of refined copper reported by the world’s main exchanges: COMEX, LME and SFE (the Shanghai Futures Exchange). Note that since the end of March 2018 the stocks have gone down by 605 thousand tons (a drop of 57%). Definitely, it is a long-term bullish signal for copper but we should keep in mind that the physical market is of limited value as long as trading decisions are concerned. 

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Gold Whispers That The US Dollar Is Ahead Of A Leg Down

In my last piece on the US dollar and gold (October 21, 2018) I made the following conclusion:

“It has to be also noted that the excessive optimism among the speculators trading US dollar index futures is accompanied by extreme pessimism among their fellows trading gold futures. As a result, there is an extremely positive mix of sentiment, supporting a bullish thesis on gold and the precious metals market”

Since the publication the gold has not changed its price while the US dollar is up 0.4%. So, generally, both instruments have done nearly nothing. It means that it is a good time to look at the general picture once again. Here it is:

Source: Stockcharts

I think the chart shows quite an interesting pattern:

• The US dollar is printing a double top formation (the green, horizontal line)
• The gold is relatively strong, compared to the greenback (two red circles)

Logically, when the US dollar is topping the gold is supposed to test its previous bottom but…it is not the case now. Note that at the latest US dollar top (October 31, 2018) the gold, instead of getting close to the latest bottom at $1,170 - $1,180 per ounce, was standing at $1,215 per ounce.

In other words, the gold is suggesting us that the scenario discussed in my latest articles (bullish for gold and bearish for the US dollar) is still valid.

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A Quick Look At Gold And US Dollar (Going In Tandem)

On September 30, 2018 I published a short piece on the US dollar. The conclusion was as follows:

…if something cannot go up pushed by hordes of optimists, it is supposed to go down. Summarizing – I am bearish on the US dollar in the medium term”

After nearly one month the situation has not changed too much. Over that period:

• The bears (big speculators betting on a weaker US dollar) increased their bets by 1.5 thousand contracts
• The bulls (big speculators betting on a stronger US dollar) added 2.4 thousand contracts to their bullish bets
• As a result, the total balance was positive for the bulls – a net long position held by big speculators in US dollar index futures has risen by 0.9 thousand contracts

As a result, the average speculator trading US dollar index futures is overly optimistic about the US currency but the problem is that this huge optimism has only marginal impact on the greenback itself – since September 30, 2018 the US dollar has strengthened by a mere 0.7%. I am not surprised – if everybody is in one camp, most probably the opposite happens.

What is more, over that period the gold has strengthened as well (by 2.7%) so we have quite an interesting situation where the gold (red arrow) and the US dollar (green arrow) are going in the same direction:

Source: Stockcharts.com

It has to be also noted that the excessive optimism among the speculators trading US dollar index futures is accompanied by extreme pessimism among their fellows trading gold futures. As a result, there is an extremely positive mix of sentiment, supporting a bullish thesis on gold and the precious metals market. 

US Dollar - I Am Bearish

According to the COT data, since May 29, 2018 the big speculators betting on a stronger dollar have increased their bullish bets by 13.0 thousand contracts. Over that period the bears (big speculators betting on a weaker dollar) cut their bets by 21.4 thousand contracts. As a result, a net long position held by these traders went up by 34.4 thousand contracts but…the US dollar index has not changed at all (94.8 on May 29 compared to 94.7 on September 28):

source: Simple Digressions

What is the takeaway for speculators? Well, in my opinion, if something cannot go up pushed by hordes of optimists, it is supposed to go down. Summarizing – I am bearish on the US dollar in the medium term.

Copper Looks Promising

It looks like there is a good chance for better times for copper. Look at the chart below:

Source: Simple Digressions and the COT data

Note that now the so-called commercials, mostly copper producers, hold a net long position in copper futures (the red circle). Last time they held a similar position was October 2016 when copper prices were at the beginning of a vicious bull market (the green circle).

If I am correct, we may be ahead of another leg up in copper and this week’s white bullish candle (just forming) could be the first sign of it:

Source: Stockcharts.com