Copper and Inflation are closely tied together. This makes sense. If economic activity is strong, demand for copper increases and so do overall price pressures. Likewise, if economic activity declines and there is selling in copper it trickles through to the rate of inflation. As it is, the United States appears to be beginning a slower patch with economic growth. Data is being released and there is a consistency that shows economic activity is declining. China, one of the world's biggest copper consumers, housing data was released just yesterday. That data is declining and is likely to go much lower. Copper fell on the news. Expect that trend to continue.
The latest economic data from the United States to hit the wires showed Inflation dipping for the month of March with a revision lower in February:
I am not one to claim that one data point makes an economy. But, there are other data points that show the economy is slowing. We have seen declines in the growth rate in incomes and consumption, the real drivers of the American economy. If incomes flatten or decrease, as they have been, and consumption follows suit there is no potential for growth. This is the story of what is going on in the U.S. economy.
The story in China is far greater and compounds the American story even more. The Chinese economy has been grappling with a real estate issue. In some major metropolitan cities the prices of real estate continue to rise, whereas in smaller cities there are entire buildings sitting vacant. The Chinese government has addressed some of the issues and tried to limit credit and lending. There are signs this is working.
As the two charts suggest, the index has peaked and is heading lower. Because of the limitations on credit and lending the demand for houses has declined.
That decline in housing has an overall effect on the price of copper. If the world's biggest consumer of copper slows its housing development then copper will fall in demand. Readily, you could look at demand as the first step to price increases. I have below the two latest charts with copper versus United States inflation and then copper versus China inflation:
The Chinese government has gotten very serious about addressing its real estate issue. The limitations imposed have made inroads into the problem. However, the spillover effects are that wealthy Chinese are buying homes outside of the China and are having serious effects on the real estate in cities such as Seattle and Sydney.
I believe the long term effects are that the overall Chinese real estate market sees a significant decline in value. There will be some wealth effects from this that will limit future purchases of real estate in the cities the Chinese are targeting for their purchases. That may dampen further demand for real estate and by consequence, the price of copper is likely to continue to fall further. On the news just yesterday that the Chinese property market slipped lower the price of copper dropped. It has since fallen more one day later. The market is starting to digest the very longer term picture of what is happening in the world's biggest real estate market:
The Trump bump may get undone in copper very soon. Price activity is looking sluggish. I do not do technical analysis but can see prices breaking below the recent support levels of $2.48. But, the bigger picture is what I am looking at. I think copper will push below the $2.25 level as the months wear on.
However, I am not entirely sanguine on this issue. The real crux to this is the American housing market. Housing has been strong in the United States. In fact, I would venture to guess that it might be the strongest part of the economy. The U.S. economy looks like it is entering a soft patch. Plus, interest rates are heading higher while simultaneously the Federal Reserve is shrinking its balance sheet which will act like a tightening on the economy, removing money from the money supply. I am not so sure that the strongest portion of our economy has the resiliency to counterbalance the downside effects of the Chinese property market. This will be something that I will watch aggressively with this analysis. It is a key variable.
For now, I am bearish on the American economy as well as the Chinese economy. This will translate into copper prices falling.
Disclosure: I am/we are short COPPER.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.