The Malthusian ideologues of "peak everything" fooled an outsized portion of the investing world into believing that commodities and commodity stocks could only go up.
Even if these Malthusian prophets of scarcity were correct in their basic theory about the long-term supply and demand fundamentals for commodities (I think that they are partially correct depending on the time-frame you look at) the fact is that they are only correct from a secular standpoint, if at all.
The problem is that many of these folks have confused secular with cyclical and seem to believe that it's all the same. It is not.
The business cycle has not been repealed. Neither has the basic fact that the prices of commodities are cyclical. Commodities prices fluctuate wildly with the business cycle. That has always been the fact and it always will be.
The Malthusians seemed to forget this basic fact while they were "laughing all the way to the bank" to go on margin and buy more commodities. Too bad they did not remember that in global economic downturns, commodity prices fall, and fall hard.
Malthusian ideology is the only explanation I can think of why analysts are shocked that the price of copper has fallen. With deteriorating global growth prospects evident months ago, the only shock should be that they had not fallen further and sooner.
What should be of even greater concern is that analysts do not seem to have come to grips with the fact that in the kind of global economic environment that we are in right now, copper prices cannot be sustained at current bubble-type prices of $3.72 per pound.
In an article published on August 9, 2011, I wrote that, "it would be very surprising if oil did not fall below $70 and copper did not fall below $3.00." I have even have even more reason now to be surprised if copper prices do not fall below $3.00.
As suggested in the aforementioned article, the key catalyst for this sort of collapse in the price of copper (as well as other commodities) will be signs of significant slowing of the Chinese economy. China's economy is highly export dependent, and the economies of it's main trading partners are currently decelerating and/or contracting.
As soon as China's (NYSEARCA:FXI) economy shows the first signs of being seriously affected by the current global economic and financial crisis, we will se copper prices (JJC, CU) at around $3.00 or below.
I expect Commodity oriented stocks and ETFs such as Freeport-McMoran Copper & Gold Inc. (NYSE:FCX), Rio Tinto plc (NYSE:RIO), VALE, Southern Copper (NYSE:SCCO), COPX, Energy Select Sector SPDR ETF (NYSEARCA:XLE), iShares Dow Jones US Oil Equipment Index ETF (NYSEARCA:IEZ), to be down by 25% or more from current levels.
In the case of the copper stocks specifically, they have attracted many investors based on juicy dividend payments and outsized yields. I believe that these dividends could come into serious question with $3.00 copper prices. If this occurs copper stocks could be decimated by 35% or more from current levels. These stocks should be avoided and short positions can be considered.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.