PPI of Copper Ores and Grains Both Show an Unpredictable Future

Lately, we have demonstrated that the evolution of various components of CPI and PPI in the United States is not a random process but rather a predetermined one with long-term sustainable trends [1-4]. Using these trends, one can predict consumer and producer price indices for various goods, services and commodities [5-7]. Moreover, share prices for selected S&P 500 companies are also well described in the past by the differences in the PPI and CPI [8,9]. The near future will test the predictive power of our model.

In [4-7], we presented the evolution many commodities with varying weight in the PPI. But there are many more commodities of interest for producers, consumers, and investors. Here we compare the indices for copper and grain. The evolution of the producer price indices of these two commodities is independent, but both give a good example of the absence of clear sustainable trends. In other words, not every commodity price is predictable, as mentioned in [4].

Figure 1 displays the PPI and the index for copper ores since 1988. The difference of these two indices has a remarkable history; no big change between 1988 and 200, and then a sudden peak in the copper index. The peak survived during three years before 2008, and then the index dropped by 300 units back to the PPI level. Despite the early start in 2005 seems oil independent, the most recent fall looks to be driven by oil price and the overall economic slowdown. In 2009, one can observe a slight increase in the cooper index likely associated with the rise in oil price. In the long-run, oil price should decline to the level of $25 in 2016. Therefore, copper price will likely not be growing to its peak in April 2008 (491.7). In any case, our model based on the presence of sustainable trends in the difference between the PPI and individual PPI is not applicable to copper ores.

Figure 1. Evolution of the price index of copper ores and the PPI.

The producer price index for grains presents another difficult case. Figure 2 depicts the PPI and the index, and their difference between 1960 and 2009. There is no sustainable trend in the difference as well. Between 1974 and 2005, the difference demonstrated an overall growth with several spikes, the strongest one in 1996. The presence of a long-term positive trend in the difference is completely due to the growth in the PPI because the index for grains fluctuates around a constant line. Lately, the grains index suffered the biggest rise and fall in absolute terms. The main increase started earlier 2007 and stretched into 2008, with the peak in June 2008. Volatility during the past two years was so high that it is difficult to predict the next move of the price index of grains. Seemingly, it has been repeating the trajectory of the index for crude oil in 2008 and 2009. If it is the case, one can expect that the index for grains will continue to oscillate around the constant level of ~100.

Figure 2. Evolution of the price index of grains and the PPI.

Conclusion

The producer price index for copper and that of grains both demonstrate unpredictable behavior with unclear future. This observation only emphasizes the importance of sustainable trends observed for other commodities. In the US economy, as in many natural systems, there exist trend components, oscillating components, and random components.

References

1. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

2. Kitov, I., (2009). Apples and oranges: relative growth rate of consumer price indices, MPRA Paper 13587, University Library of Munich, Germany.

3. Kitov, I., Kitov, O., (2009). A fair price for motor fuel in the United States, MPRA Paper 15039, University Library of Munich, Germany,

4. Kitov, I., Kitov, O., (2009). Sustainable trends in producer price indices, Journal of Applied Research in Finance, v. 1, (in press)

5. Kitov, I., Kitov, O., (2009). PPI of durable and nondurable goods: 1985-2016, MPRA Paper 15874, University Library of Munich, Germany

6. Kitov, I., (2009). Predicting gold ores price, MPRA Paper 15873, University Library of Munich, Germany

7. Kitov, I., (2009). Predicting the price index for jewelry and jewelry products: 2009-2016, MPRA Paper 15875, University Library of Munich, Germany

Comments

[Mad Hedge F...:]

So they do. I have to tell you that my old friend, Dr. Copper, the only commodity that has a PhD in economics, has decisively broken resistance at $2.25 and hit a new high for the year at $2.40, up 78% from the year’s low. If you recall, I was feverishly pounding on the table trying to get people to buy the red metal at $1.35 in January (see www.madhedgefundtrader... ) . I also was pushing the world’s largest copper producer, Freeport McMoran (FCX) at $30. Is this the definitive breakout that will lead us into the next leg of the global equity bull market? I don’t know, but there is one thing that makes me feel queasy. Our illustrious state’s public employee pension fund, CALPERS, has announced that it is again making asset allocations to the commodities area. When they did this a year ago, it all ended in tears, putting in the spike tops in every commodity across the board, followed by the mother of all crashes. California teachers saw their pension payments cut. You would think that once burned is twice forewarned. Is history about to repeat itself? CALPERS, with $170 billion in assets, down a third from the peak, it’s just too big to play in this space. This is the playground of end commodity producers and professional traders. It’s like sharing a very small cage with a very large, 800 pound gorilla, who, oops, is horny. All they can do is damage. Better for them to go back to being a closet global index fund. But keep an eye on Dr. Copper anyway.

Jun 28 03:58 PM

[Ivan Kitov:]

I would say from Figure 1 that the index of copper ores has a good growth potential till December 2009, where it will meet the level around 300.

This could be the end of the success story for a while.


On Jun 28 03:58 PM Mad Hedge Fund Trader wrote:

> So they do. I have to tell you that my old friend, Dr. Copper, the
> only commodity that has a PhD in economics, has decisively broken
> resistance at $2.25 and hit a new high for the year at $2.40, up
> 78% from the year’s low. If you recall, I was feverishly pounding
> on the table trying to get people to buy the red metal at $1.35 in
> January (see www.madhedgefundtrader...
> ) . I also was pushing the world’s largest copper producer, Freeport
> McMoran (seekingalpha.com/symbo...) at $30. Is this the
> definitive breakout that will lead us into the next leg of the global
> equity bull market? I don’t know, but there is one thing that makes
> me feel queasy. Our illustrious state’s public employee pension fund,
> CALPERS, has announced that it is again making asset allocations
> to the commodities area. When they did this a year ago, it all ended
> in tears, putting in the spike tops in every commodity across the
> board, followed by the mother of all crashes. California teachers
> saw their pension payments cut. You would think that once burned
> is twice forewarned. Is history about to repeat itself? CALPERS,
> with $170 billion in assets, down a third from the peak, it’s just
> too big to play in this space. This is the playground of end commodity
> producers and professional traders. It’s like sharing a very small
> cage with a very large, 800 pound gorilla, who, oops, is horny. All
> they can do is damage. Better for them to go back to being a closet
> global index fund. But keep an eye on Dr. Copper anyway.

Jun 28 04:11 PM