What the Big Money Is Telling Us About Copper’s Next Move

Video Transcript

Hi, this is JR Crooks for Uncommon Wisdom Daily.

The latest economic data out of China has been mixed — some good, but mostly bad. For that reason, most experts believe that China needs to, and will, implement new monetary stimulus.

However, I don’t think the country will be able to follow the same strategy it did after the 2008 financial crisis, when it unloaded a massive amount of cash on the economy.

I think China will pursue a more-modest approach, but the extent of the new stimulus will largely be determined by what happens in the global economy and the markets. In that regard, I think two possible scenarios are the most likely.

In Scenario No. 1, global debt leads to a deeper economic slowdown, which leads to a major bear-market move. China realizes it has to confine its easing policies to interest rate cuts, because more stimulus could add to overcapacity, re-inflate credit bubbles and provide even more upward pressure on the Chinese housing market.

In Scenario No. 2, an extended period of slow growth is priced in, while economic dependency and the status quo are tolerated. In this scenario, China may be able to implement a more-robust stimulus package, in which investment in infrastructure and loan growth compensate for lack of export growth.

I still think Scenario No. 1 is more likely, but just barely. In either case, I’m seeing some opportunity for investors in a surprising place — copper.

I say surprising because there are some very negative influences on copper prices right now. Obviously, one of those bearish forces is the slowdown of Chinese economic growth, because China is the world’s largest copper consumer.

In addition, demand from Europe has slowed sharply, and may slow even more as the euro-zone economy heads into recession. Plus, we’re seeing increased production of copper from the world’s largest copper mine, in Chile.

All these factors are contributing to a very bearish stance among copper speculators — including hedge funds, money managers and independent traders.

That’s represented by the blue and yellow bars on this chart. They’re heavily short copper, which means they expect prices to fall.

But you’ll also notice that commercial traders are on the opposite side, expecting prices to rise.

Historically, when we see that kind of discrepancy, the commercial traders are usually right and the speculators are usually wrong.

Now, I should mention that, from a technical standpoint, the copper market is looking pretty ugly. The head-and-shoulders formation you see here usually indicates a decline is coming. Add that to the weak fundamentals, and I can understand why the speculators are betting the way they are.

But like I said, when large speculators are positioned so heavily one way or the other, they’re usually wrong. So until their positioning becomes less extreme, I’m betting on copper prices to rise.

If you’re not comfortable trading in the futures markets, you can get in on the action with the iPath Barclays Total Return Copper Fund, symbol JJC. But there are lots of other ways to play copper, along with China and commodities in general. And I’m hard at work on identifying those investments for my subscribers right now.

For Uncommon Wisdom Daily, I’m JR Crooks. Thanks for watching.