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Dr. Copper Says What…?

Posted by nexvucapital on November 28, 2012

Since the 2008 asset price bottom, copper has generally traded above US$ 3.00 per pound for the past 4 years against a global economic backdrop that has been less than ideal to say the least. Question – Why? Global copper demand should be weak during a pro-longed period of moderate to negative global growth. You know – Dr. Copper.

Whether copper is an accurate measure of the pulse of the global economy has been in debate for years. This debate has intensified in the past 10 years as pure copper investment has become more common. The effect of pure investment (hedge funds and other quick money) moving in and out of the copper market seems to have an effect on volatility in the short-term but that effect seems to moderate over the medium and long-term.

Demand and supply are more important factors. The world has more than enough copper (remember it is re-usable) but the world seems to be running out of cheap copper – just like it ran out of cheap oil. Therefore, like oil the price of copper could be reflecting the rising cost to find, develop and produce copper. More important than the price of copper is the Marginal Cost of copper which seems to be approximately US$ 2.50 per pound which at today’s price of US$ 3.50 creates a gross margin of approximately 30%.

Inflation (the devaluation of currencies) is also a consideration. Simply put if tomatoes and bread are more expensive then copper should also be more expensive.

A final consideration (I am not a conspiracy advocate) is that the copper market is controlled by several very large and profitable mining conglomerates who have a vested interest in maintaining margins on the sale of their products and this can constrain supply/maintain prices independent of market forces.

I have attached the daily and weekly copper charts for anyone interested.

Copper Daily – November 28 2012

Copper Weekly – November 28 2012

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