Why Copper Doesn’t Like the S&P500

Let’s kick off today’s Markets and Money with a chart. It might give you an important clue into just what’s going on in the global economy.

But wait, before we do, consider this headline in today’s Financial Review: ‘”Wall of LNG” poses threat for gas players’.

The article describes how a huge wall of gas will hit the global market by 2017-18, supplemented by supplies of US shale gas. That’s not good news for Australian LNG projects. Why? Because US gas prices are the lowest in the world and Asian prices the highest. If the US starts exporting, you can bet the two markets will begin to converge in price.

For east coast Aussie projects that received the go ahead based on the strong Asian price, this could mean lower future returns on production.

The winners in this market upheaval could be those focused on supplying to the domestic market, where prices are currently relatively low too. And much of that future supply could come from Australia’s vast shale gas reserves in the Cooper Basin and elsewhere.

We’ve never been too sharp when it comes to energy. All we see are huge capital commitments, high risk and uncertain future returns. But our mate Dan Denning has been on the case for years. And he’s pretty excited about the potential opportunities in Australia’s fledging shale gas industry. There’s a lot of gas in the desert, and energy majors are getting interested. According to Dan, speculative profits await.

Click here to find out more.

Ok, back to the chart. It shows the performance of the S&P500 (red line) and the copper price since the March 2009 low. As you can see, these important economic barometers have tracked each other pretty well since then.

Copper moved ahead of the S&P500 in the second half of 2010 and the first half of 2011. We’d probably put that down to the strong performance of China’s economy over that timeframe. Then they joined up again for about 8 months from October 2011.

But since bottoming in mid-2012, the S&P500 has rallied strongly, while copper prices have basically moved sideways. And the divergence between the two has only increased in 2013. This is just another confirmation that the real beneficiaries of Bernanke’s largesse are financial assets, not the actual economy.

Maybe copper will catch up to the S&P500, maybe the S&P500 will catch up to copper? How about a short S&P/long copper trade?

More Divergence – Copper V S&P500


Or maybe we should just put it all down to China. Last week, Bloomberg reported:

‘Copper fell in London after imports into China, the biggest buyer, tumbled to the lowest in 20 months and as stockpiles of the metal expanded.

‘Chinese shipments of refined metal, alloy and products were 298,102 metric tons last month, the General Administration of Customs said today. Stockpiles in LME-tracked warehouses climbed 5.9 percent to 509,425 tons, the highest level since April 15, 2010. Inventories, up 59 percent this year, grew on deliveries in Singapore, Gwangyang, South Korea, New Orleans and the Belgian city of Antwerp.

‘”There is a lot of metal in China,” Robin Bhar, an analyst at Societe Generale SA in London, said by phone today. “We should see imports slowing this year.”

‘Refined copper supply will exceed demand by 176,000 tons this year, the most since 2009, according to Credit Suisse Group AG. Imports of refined copper by China will drop 11 percent this year, according to Barclays Plc.’

That’s strange, we thought China was ‘recovering’. Apparently it’s on track for 8% economic growth this year after suffering a slowdown in 2012. Why isn’t that translating into an increase in demand for the building block of economic growth – copper?

We’re not sure, to be honest. There may be a legitimate reason. But we’d guess there’s not. We’d guess that China’s recovery is not very real at all. And that weaker demand for copper imports reflects the malaise of China’s credit-distorted and hopelessly imbalanced economy.


Greg Canavan
for Markets and Money

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From the Archives…

Ben Bernanke’s Pseudo Logic
8-03-13 – Dan Denning

China: The Biggest Bubble Ever?
7-03-13 – Bill Bonner

The Disaster of Central Planners and Other Simpletons
6-03-13 – Bill Bonner

What the Shale Gas Revolution Could do to LNG Prices
5-03-13 – Dan Denning

Politicians Are Clowning Around With Your Wealth
4-03-13 – Dan Denning

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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