Why Copper ETFs Are Pulling Back

Includes: CU, DBB, JJC
by: Tom Lydon

What just happened? Copper, a widely held bellwether for economic activity, has suddenly pulled back. Exchange traded funds that track the metal have lost their gains for the year. What’s going on here?

Copper prices reached a closing high of $3.6505 on April 5, but since then they’ve plummeted 12.5%, writes Josh Lipton for Minyanville. With the dropping prices, miners are taking a hit, too. Analysts and metal observers attribute the plummeting prices of copper to increasing concerns over European solvency and China’s tightening measures, which also targets the metals-intensive real estate sector. [Global X Launches Copper and Silver Mining ETF.]

But now what? Is copper done…just like that? There are varying opinions on the matter:

  • Tom Pawlicki, precious metals analyst with MF Global, remarks that copper is being pummeled due in part to Chinese stockpiling the metal and by Chinese central bankers who are cautious about inflation and new asset price bubbles. China’s self-imposed cooling of its economy limits the demand for copper.
  • The International Copper Study Group estimates that Chinese demand for copper could drop 13% in 2010 as compared to a 38% increase in 2009. However, the group believes that the average increase of 6.9% in the United States, European Union and Japan will more than offset the decline in China.
  • Consumption of copper worldwide is predicted to fall 1.5% this year, with a surplus of about 578,000 metric tons.
  • Pawlicki believes a correction is coming and says that copper prices could trade down to $2.80, with an average of $3.20 for 2010.
  • Goldman Sachs analysts Allison Nathan and Tiger Chen argue that recent moves in copper are too exaggerated, noting that a solution for Greece will be found and that the new Chinese measures don’t exclude new construction.

The real answer may lie in the trend lines. Right now, JJC is just 1.1% above its trend line and it’s down so far this morning, meaning that we could see it cross below it. If you’re in copper funds, have your stop-loss ready; if you’re considering copper, wait until the trend reappears before you consider jumping in. [How to Follow Trends.]

For more information on copper, visit our copper category.

  • PowerShares DB Base Metals (NYSEARCA:DBB): 33% copper futures contracts (the other two-thirds are evenly split between aluminum and zinc)

Max Chen contributed to this article.

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