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Has Dr. Copper Been Screaming About A Recession That Only Few Heard?

By Investing.com (Barani Krishnan/Investing.com)CommoditiesOct 02, 2019 04:29AM ET
www.investing.com/analysis/has-dr-copper-been-screaming-about-a-recession-that-only-few-heard-200469792
Has Dr. Copper Been Screaming About A Recession That Only Few Heard?
By Investing.com (Barani Krishnan/Investing.com)   |  Oct 02, 2019 04:29AM ET
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Treasury spreads and yield curves have become the most common ways to tell a potential recession now. But not too long ago, there was another instrument that traders relied on for this: copper.

Used in construction to power generation to circuity of cellphones and almost every electronic device, “Dr. Copper”—as the red metal is still fondly called by some commodity veterans—enables those who study it well the ability to “diagnose” a slowdown way before it arrives.

Copper Not Getting The Attention It Deserves

Copper Daily Chart - Powered by TradingView
Copper Daily Chart - Powered by TradingView

To those analysts, sliding prices of copper have been screaming “Recession!” well before the yield curve inversion in 10-Year and 2-Year Treasurys deepened earlier this year. Only that copper hasn’t got the attention it deserves, as there are more “exciting” metals like gold and palladium to consume investors’ interest these days.

In Tuesday’s trade, copper futures posted another decisive bottom after The Institute of Supply Management flagged U.S. factory activity at a 10-year low, underscoring a continued slowdown in the goods-producing sector.

Benchmark copper for December delivery on the New York Mercantile Exchange’s Comex division slumped to a one-month low of $2.515 per lb on the ISM data. It did recover slightly before the close to settle at $2.5606, down 0.7% on the day.

Red Metal’s Price Could Be On The Cusp Of Another Breakdown

To Eric Scoles, metals strategist at RJO Futures in Chicago, traders should not be taking their eyes off copper now as it is on the cusp of another breakdown that would point to an even more vulnerable state of the economy.

Said Scoles in a recent note:

“There is a support point at $2.483. If prices break below and close under this level, a major sell off is likely.”

“It’s also important to note there is a gap on the weekly chart from 2016, and as the old-adage goes: ‘The gap is meant to be filled’. For traders this could become a significant bearish opportunity; for those who deal in physical copper this could be the time to hedge.”

Investing.com’s Daily Technical Outlook has a “Strong Sell” call on copper, projecting a downside as low as $2.469 in the near-term.

Edward Meir, a veteran consultant for copper at INTL FCStone in New York, was quoted saying in the Wall Street Journal that the ISM data intensified worries about a broad U.S. economic slowdown, baked into copper prices.

Manufacturing Slowing Down Everywhere

The WSJ noted that other major economies have also experienced a slump in manufacturing, putting further pressure on copper, which is used to build everything from office buildings to electric vehicles.Added Meir:

“When you have every major manufacturing hub slowing down, metals consumption will suffer as a result.”

Scoles said copper hasn’t been been given its due attention lately as a foreteller of the economy:

“Typically, when discussing the likelihood of an oncoming recession and referencing futures markets, you will hear a whole lot about Treasurys spreads and yield curves. However, what has been standing out to me is the copper charts.”

“Why? Because copper represents construction, it represents industry, and its demand is strongly correlated with economic expansion and growth globally.”

Scoles said that if the developing chart pattern indicated the potential for copper prices to fall dramatically and for an extended period, it would not be because of an explosion in production, but rather the shriveling of demand.

He added:

“If economic expansion directly increases demand and drives the price of this commodity up, then what (will) push it down will likely be economic recession.”

Will A U.S.-China Trade Deal Come Quick Enough To Avert A 'Wildly Bearish' Bear Market?

To Scoles, Chinese demand was what has been driving copper in either direction, and fundamentals were supportive of a bear market in the metal unless the United States reached a trade deal with China in the near future.

He noted that the December copper futures chart indicated a market that could be stuck in a massive multi-year head-and-shoulders pattern forming between November 2016 and current day fluctuations.

That, according to him, shouldn’t be ignored:

“Dec. 19 copper is becoming wildly bearish from a technical perspective as the massive multi-year head and shoulders pattern on the weekly chart looks near complete.”

Has Dr. Copper Been Screaming About A Recession That Only Few Heard?
 

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Has Dr. Copper Been Screaming About A Recession That Only Few Heard?

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Comments (7)
shark tank
shark tank Oct 04, 2019 7:29PM ET
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it's still above support. so that's all that counts.
Adam Br
Adam Br Oct 02, 2019 10:25PM ET
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Somebodies holding some bags, ROFL
supri yanto
supri yanto Oct 02, 2019 9:50AM ET
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hello sir
Barani Krishnan
Barani Krishnan Oct 02, 2019 8:40AM ET
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Thanks for the feedback, everyone. Our Twitter handle is @Investingcom. Mine is @barani_krishnan.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Oct 02, 2019 7:23AM ET
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Sometimes things don’t happen the same way dear writer, you’ve got other very clear indicators for the thing that is happening now, if you would you could call it a recession. Gold and silver are the first store of value known by man, you can look at the charts, and you will find more clear answer than the one you search for in copper.
Barani Krishnan
Barani Krishnan Oct 02, 2019 7:23AM ET
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True, but silver has historically been a lesser economic indicator than copper despite its wide industrial applications. And one "goes" to gold as a store of value AFTER realizing all isn't "too well"; a realization typically flagged by copper first.
Tim Boyd
Tim Boyd Oct 02, 2019 7:23AM ET
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The "gold as a store of value" thesis has changed somewhat in the last 20 years with the dawn of near-ZIRP monetary policy and the concomitant rise in popularity of the carry trade. Prior to the Dot-com shock, gold prices benefitted from inflation more than anything else, but nowadays gold tends to get hammered whenever anything causes interest rates to tick up. Everyone is SO desperate for yield that rate movements trump all.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Oct 02, 2019 7:23AM ET
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Barani Krishnan (And one "goes" to gold as a store of value AFTER realizing all isn't "too well"). . By building facts by your words: gold prices are rising, that means that people realizing that all isn't too well, regardless copper performance.
Barani Krishnan
Barani Krishnan Oct 02, 2019 7:23AM ET
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But you seem to be missing the point: Gold isn't the trigger; it's the effect. Of course, the rush into gold will likely pull along and sustain a herd crowd. But that wouldn't have materialized on its own without a flight to safety event. And those events at one time used to be flagged by copper and now, increasingly, Treasurys.
Barani Krishnan
Barani Krishnan Oct 02, 2019 7:23AM ET
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While gold remains a haven, agree that its allure isn't as great as what it was in the pre-dotcom era.
YungJun Kim
YungJun Kim Oct 02, 2019 6:52AM ET
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Hi, I've read your some articles which mainly are related to  commodities such as oil, natural gas etc. If possible, I wanna ask some questions to you. Would you think the oil future will be gradually down? I have some oil ETN, but I think it is not good decision because of the EU's sanction against chemical materials such as oil, gasoline etc. and relatively stable situation on middle-east (than past situation). How do you think above it? in this situation, is there any hopeful case that Fed's interest rate cut?
Barani Krishnan
Barani Krishnan Oct 02, 2019 6:52AM ET
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Oil ETNs, like any exchange-traded note, are to reflect the underlying commodity. Since the risk premiums from the Saudi attack evaporated, oil has been searching for some anchor to stay (or, as of late, return) to $60 pricing. So, from an investment perspective, you'll have to wait it out to see if there are longer-term supports that the market will be able to cultivate. With Tuesday's poor US ISM reading, there is a chance the Fed might cut again. But then again, it's only one piece of data. We need more. At its last meeting, there was dissent even to the modest quarter point cut. If the Fed is done cutting for now (and I think they should until they see clearer reason to do more), Wall Street will take that as a bad sign and lead the markets from the back.
Sheikh Sheikh
Sheikh Sheikh Oct 02, 2019 6:50AM ET
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What will be the effect of no deal brexit on the price of gold?
Barani Krishnan
Barani Krishnan Oct 02, 2019 6:50AM ET
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Fundamentally, it should push gold back to 1550 or beyond.
 
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