Today In Silver

We’ve had a lot more talk about copper out there and most of it continues to be positive, which is a great contrarian signal for an upcoming opportunity to short copper. For example there is Scott Wright of Zeal who claims the secular bull market in copper is about to resume:

Now even though Armageddon hasn’t bestowed itself upon the copper market much to the dismay of the doom-and-gloomers, these trying economic times are expected to significantly alter its landscape. Copper demand is indeed likely to fall and I suspect it will be quite some time before we see the torrid growth rates that supported the initial stage of its bull market.

But demand may not be as poor as people think and growth might resume in this sector faster than people are forecasting. And from my contrarian viewpoint it looks as though things are lining up for the copper market to regain momentum and continue in its secular bull.

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From mid-2005 to mid-2008 copper averaged over $3, thus prompting aggressive industry-wide exploration and development programs. These high prices also allowed the producers to profitably mine lower-grade ore within the confines of existing operations as well as bring past-producing mines back to life.

But these lower-grade, thus higher cost, operations and development projects that were economically feasible at higher copper prices are now losers. Production cutbacks, mine closures, and the scrapping of now-uneconomical exploration and development projects will eventually translate into materially lower mine production. Supply will eventually shrink enough to balance demand, even if demand stays weak for an extended period of time.

Regardless of where this balance is met, I believe copper has seen its low. And investors and speculators have taken advantage of this wildly oversold environment to reap fantastic gains as the markets bounce back to reality. As mentioned the futures traders have seen the metal pop 50%+ since the beginning of the year. But stock traders have fared even better.

I have news for you, Mr. Wright. When you, Dennis Gartmann and just about everybody else is saying “copper has bottomed”, it probably hasn’t. And your call certainly isn’t contrarian, just witness the chorus now singing the praises of King Copper. Here is Gartmann’s latest:

The economy is beginning to show some “green shoots,” adds Gartner, including this morning’s Wells Fargo earnings report. And that makes copper and aluminum commodities worth buying.

Here are the facts. There have not been major shutdowns in copper mines so far, certainly nothing approaching the shutdowns in zinc, molybdenum and nickel. Indeed, over at Metal Augmentor we have documented shutdowns and pending closures amounting to around 10% of annual zinc mine output. There have been minor shutdowns, production adjustments and the like in copper mines but there have also been new startups and expansion such that I expect 2009 copper mine production will be relatively stable in comparison to 2008. At the same time, global copper end-demand could decline by as much as 10% from its 2007-2008 peak (some predict a 15-20% decline). Forget about China and its infrastructure projects, copper is primarily used in residential construction, durable goods (cars, appliances, factory equipment) and power generation (turbines). Chinese infrastructure projects, short of building Western-style suburbs, will come nowhere near being able to substitute for the decline in global construction and manufacturing.

Even if the economy is “beginning to show some ‘green shoorts’” as Mr. Gartmann guesses, we are still far from seeing new life in U.S. or European residential construction or a major resumption in buying of durable goods or factory construction. As such, global copper demand will remain poor for quite some time and I would actually argue that copper has among the poorest short-term fundamentals of the base metals, most of which (unlike copper) have already seen drastic declines in mine production, have been already trading below marginal mining cost on a global basis, and might actually see appreciable demand resulting from infrastructure projects in China and elsewhere (zinc, moly and nickel in particular as they are important constituents of steel used in various types of large infrastructure projects such as bridges, commercial buildings, transmission and transportation systems, etc.).

As I’ve stated before, copper may run as high as $2.25 - $2.50 on a spike before correcting hard. If so, I would consider such a price level to be an extremely attractive shorting opportunity. The speed at which the copper price will retract from a spike to $2.50 could be quite amazing (a $1.00 drop in a week or less), making put options a good choice once again. Moreover, unlike last summer when the copper miners such as Freeport-McMoran (NYSE:FCX) and Southern Copper (NYSE:PCU) declined in advance of the crash in copper prices, this time we could see both fall at the same time and thus a put option strategy might work with both COMEX copper and the copper miners themselves as well.

If I see a profitable opportunity, I will be sure to provide some highlights here and describe it in detail for Metal Augmentor subscribers. This is no idle threat, either, as to my knowledge I am on record as having the only publicly documented call on copper that has ever returned upwards of 10,000% in the short run (less than 4 months). Here is what I said on July 17, 2008:

I especially like the Dec $2.50 put currently trading under $200 because it offers extreme leverage should copper fall by a similar amount from its peak (60%) as have lead, zinc and nickel. At $2.00 copper, each option would be worth $12,500. At what I think might be the eventual low of $1.60, each option would be worth over $20,000 for a legendary 100-to-1 gain.

In fact, these put options traded at expiration for well over $20,000 and at least one SILVERAXIS reader made a killing along with me. I probably won’t come anywhere close to that again but 500-1000% returns are certainly possible this time around. The only problem I see is that if I do succeed, I might have to rename this website “COPPERAXIS”.

silverax Copper