As we have noted previously, there are two particular types of information we consider in arriving at our suggested price movement estimates.  One is ‘fundamental’, or an analysis of general information such as supply and demand, industry trends, political influences, relevant economic data and so forth.  The other form of information is known generally at ‘chart analysis’ or ‘technical analysis’, referring to analyzing actual market action as depicted on price charts.

In general, we use fundamental analysis to suggest the level of desirability of the investment and technical analysis to provide us with suggested entry and exit points for any trading strategies.

With that in mind, it appears timely to take a good, hard look at the world of copper, a world which has been generating stark headlines over the past two months as the price of “Dr. Copper” has plunged by more than one-third of its value from just under $4.70 at its peak to barely $3.00 per pound early this morning.  Several fundamental factors suggest that copper’s price could come under some negative influences in the weeks and months ahead.

First, above-ground copper stocks on the London Metals Exchange have been rising rapidly and have grown from about 350,000 tons at the end of 2010 to nearly 475,000 tons at present, strongly suggesting that current supply is in excess of demand.

Second, several new copper mines are likely to enter production in the coming year or two, further exacerbating the supply-demand imbalance.  Two projects which come to mind are the Baja Mining Bolero project in Mexico which is scheduled to come on-stream in 2013 at an initial production rate of about 125,000,000 pounds per year and the much larger Ivanhoe/Rio Tinto Oyu Tolgai project in Mongolia slated to produce at the rate of 1.2 billion pounds of copper per year.

Just the anticipation of such increments in new supply could be sufficient to put a damper on price expectations.  However, there is more fundamental information to consider.

China has been a major source of demand during the past decade or more thanks to their rapidly-expanding economy.  Unfortunately, it is beginning to appear that China’s rate of economic growth is in the process of abating and some analysts are actually forecasting that China may enter a period of actual economic decline in the years ahead.  Should copper demand from China abate, that could put a serious crimp in the supply/demand equation.

Our analysis of the long-term (5-yr) chart of copper shows a clear break in the two-year uptrend which held since late in 2008 and which saw copper almost quadruple in price.  The important question is whether the chart truly reflects the fundamental situation at present.  We believe it does and current information continues to pour in which we believe indicates that serious problems continue to plague the world’s economies, thereby dampening any anticipation of a rapid growth in future demand for copper.

(Mr. Melman is a member in good standing of the Canadian Society of Technical Analysts.)

Perhaps the most closely watched economic indicators at present relate to jobs statistics and Reuters just reported that, “...the number of planned layoffs at U.S. firms in September jumped to its highest in more than two years...Employers announced 115,730 planned job cuts last month, more than double August’s  total of 54,114. ..The figure was the highest since April 2009.” 

One factor relating to economic growth has been the housing industry where the news continues to be negative.  Housing has been particularly important to demand for copper in terms of appliances, electric wiring, hot water heaters and so forth, as well as being an important factor in the overall employment picture.  A wall Street Journal study just confirmed that the industry continues to, “...endure a prolonged slump, many of the jobs it created are gone, and housing has now become part of what many economists see as a vicious circle that has left the wider economy struggling to gain altitude.”  The report informs us that housing once contributed as much as 17% of America’s GDP, but that portion has now fallen to just 13% with no immediate prospects for improvement.

Factory Goods Orders for August were just announced by the Commerce Department and showed a decline of 0.2, far below most expectations.  Factory Goods Orders can be an important indicator of future economic performance since they frequently indicate the direction of future consumer demand.  A negative figure for this indicator is additional evidence that future economic growth – including demand for copper – is in doubt.

These doubts are not limited to America alone.  During the “Great Recession” of 2008-09, we frequently looked to Great Britain as an early indicator of what might take place here in North America and that nation did indeed serve well in that role.  Therefore, we paid more than normal attention to a report in the “Times of London” which showed that GDP growth in Britain had come to a standstill.  Both consumer spending and industrial production have now turned negative and a noted British economist added that, “...all is not well in the UK services economy.”

The overall picture continues to show indications of potential trouble and at The Melman Report, we will continue to keep our eyes on the performance of Dr. Copper to provide us with early indications of any change in performance trends.

In the meantime, the situation in Greece and other European countries continues to have the world on edge.  However, in late yesterday’s trading, we saw clearly that the announcement of any plan which could remotely improve the European situation could swiftly impact market performance.  As the financial markets entered the last hour, the Dow Industrials were off by almost 200 points and Canada’s TSX Index was down by well over 300.  A story then crossed the news wires of a new plan which would alleviate many of the European problems and within one hour, the Dow transformed its loss into a gain of about 140 points while the TSX Index trimmed its losses by about 250 points.

All in all, market sentiment remains in a state of flux, to put things mildly.

As of 10:00 AM PDT, financial markets in both Canada and the USA are higher with the TSX Index up by about 200 points, thanks to stronger metals and petroleum prices, while the Dow is ahead by about 40 points.  Gold has recovered smartly from yesterday’s selling and now stands near $1640 while silver is once again above the $30 per ounce level.  Base metals have recovered somewhat from early selling and mining share indexes are up by about 2-3% on the session.

In other markets the US Dollar is slightly weaker, crude oil has surged by over $3.00 to near the $80 per barrel mark and long-term interest rates are moving moderately higher.

All quotes US$ unless otherwise indicated.

Next Melman Minute scheduled for Friday, October 7, 2011