Copper Mile Marker Investors Should Watch

Subscribers to Chart of the Week received this commentary on Sunday, October 9.

As soon as this week’s manufacturing data came out last Wednesday, whispers that Wall Street might get a slightly more dovish Fed lifted metal markets. As quickly as gold and copper climbed though, Thursday’s hawkish comments from Federal Reserve officials sent the metals right back down to earth, no pun intended.

At last check, copper futures were down 1.6% at $3.395, but amid Wednesday’s brief optimism, traded as high as $3.50. Schaeffer’s Senior Market Strategist Chris Prybal pointed out that $3.50 is a 50% Fibonacci retracement from its Covid 2020 bottom, per the chart below. More recently, $3.50 has alternated between support and resistance since mid-July.

Prior to this consolidation around $3.50 – which should serve as a mile marker for short-term investors – copper’s most notable contribution to the 2022 news cycle was a 20% drawdown in late July. This was covered by Schaeffer’s Senior Quantitative Analyst Rocky White, who noted that historically, copper prices tend to outperform after falling by 20% or more. Per White, “After copper fell by 20% over a two-month time frame, it averaged a return of 11% over the next six months, with 80% of the returns positive. Normally, over this time frame, copper averaged a gain of about 4%, with 52% of the returns positive.”

This time around though, metals’ sensitivity to Fed policy could derail any semblance of a rally. White also went on to note that the last two times copper was down double digits at that time of year, stocks, and copper both fell further the rest of the year. With that in mind, perhaps $3.50, given its Fib retracement, could be the best we see from the metal in 2022.

However, Goldman Sachs noted last week about the state of copper in the coming years, predicting global demand will begin to outstrip supplies by 2025. Per the Bloomberg article, “the transition to net-zero carbon economies starts and ends with metals,” says Bart Melek, head commodity strategist at Toronto Dominion Bank. “Without copper, nothing is possible.” This is especially true for electric vehicles, considering a typical gasoline-powered car uses roughly 65 pounds of copper for wiring and electronics, but an EV requires more than twice that.

It’s a convoluted picture to unpack. There’s the short-term mile marker at $3.50, plus quantitative signals that are both bullish and bearish depending on the timeframe. Sprinkle in the long-term macro outlook, and there’s a lot of noise out there. Maybe it’s no surprise then, that for now, investors seemingly want nothing to do with copper. Per the chart below, large speculators are net short on copper, and have been for some time now. This echoes what this commentary referenced back on June 22; amid short-term consolidation there’s growing pessimism surrounding copper prices.

The Dr. Copper investor theory maintains that copper helps predict the overall health of the economy. In 2022 this theory has held some weight; both copper and the S&P 500 hit lows in the summer and revisited them in September, albeit the latter’s retest was much starker. For the time being, let that $3.50 mark guide any investment thesis; the further the enigmatic metal strays form that level, the further you can count on its price action.