Trade with care, as copper’s future looks uncertain
TRADERS going long on copper over the last few years would have made enormous profits, as it rebounded from its collapse following the financial crisis. But its momentum has been flagging since February’s peak. There are still many copper bulls, but it is looking less like a one-way bet. Adding to the complexity of the trade, demand is not driven solely by its industrial uses, while traders need to keep an eye on the dollar. Volatility is likely, which could make for interesting trading, but deciding on whether to go short or long is a tough call.
In going long on copper, traders will be betting on China’s insatiable growth. For Angus Campbell of London Capital Group, despite the measures to cool inflation China is “still growing at an incredible pace.” Japan should also put pressure on stockpiles, as it rebuilds after the quake and turns the printing presses up to shake off its indefatigable deflation. “Trading base metals is a classic economic recovery play and demand for these metals will be closely monitored as Japan’s rebuilding process starts to begin,” says Michael Hewson of CMC Markets.
Buying or selling copper is not just a call on global growth – in fact you might get burnt by assuming it is. Of course, if it turns out that the Chinese authorities are sitting atop a bursting bubble then copper will come crashing down along with Chinese growth. But even a soft landing could deal the price of copper a severe blow. Since the beginning of the year, Sean Corrigan of Diapason Commodities has been charting an intriguing correlation between China’s loose monetary policy and the price of copper. There is evidence that copper is being bought on the back of cheap money, used as a store of value rather than for immediate industrial use.
Manoj Ladwa of ETX Capital feels that there could be increased movement in the price of copper: “with this volatility comes increased profit making opportunities, but also increased scope for making losses.” As such, setting the correct stop losses will be vital. Traders also need to take into account the fate of the dollar: “CFD clients can take advantage of movements in the price of copper, but they have to remember that because the base metal is quoted in dollars, when they open a position they are also exposed to movements in the US dollar as well if their account is based in sterling,” says Campbell.
For traders familiar with the movements of copper there should be enough volatility to make handsome profits. However, given the complexities involved, even they might be wise to wait for a clear direction before jumping onto the next trend.