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Bad news for copper bulls

Jason Jenkins
0 Comments|April 30, 2013

Recent data on China is not all that pretty

There’s been a lot written about gold over the past two weeks and with good reason. But let’s be clear about something…

In our current environment, governments printing absorbent amounts of money will not translate into high inflation. And if you play gold strictly as an inflation hedge, you will get burned.

As Investment U‘s Investment Director Alexander Green recently wrote, gold should be owned as a store of value. Gold and silver should be used to protect you against political catastrophe or a monetary meltdown.

Better barometer

There are other precious metals out there that tell us a better story of what’s going on in the world. One is copper.

Newly released numbers say that slow growth will be around for at least another two years. But it’s copper and not gold that tells us “why.”

Last week, the International Monetary Fund (IMF) trimmed its forecast for global economic growth. The IMF cut this year’s estimates for global growth to 3.3% – down from its 3.5% forecast made at the beginning of the year. The IMF also shaved its 2014 forecast from 4.1% to 4.0%.

The revised numbers were due to the “sequester” battle in Washington and recent struggles in Europe surrounding Cyprus and Italy.

Following the announcement, copper plunged to the lowest levels since 2011.

But there’s more to the story. Copper is a barometer for the entire global economy. The metal moves in step with news concerning global growth because its demand goes up and down sharply with the ebb and flow of economic growth. After all, new homes and strong electronics sales demand lots of copper.

Take, for example, the decline in European auto sales. New car registrations in the European Union dropped for the 18th consecutive month in March. Copper traders look at data like this for a clue about future demand. Again, cars have lots of uses for copper.

Trouble in China

If we dig deeper, we see the recent data on China is not all that pretty. Chinese GDP numbers were weaker than forecasted and Moody’s outlook on the country was cut from “positive” to “stable.”

The annual rate of growth unexpectedly eased to 7.7%. It ended 2012 running at a 7.9% growth pace. This is crucial because China accounts for almost 40% of copper consumption throughout the world.

There is a great feeling of trepidation in the copper market because the two biggest copper consumers – China and Europe – have serious growth concerns. It’s bearish for prices.

Metals haven’t hit bottom. China plays a big role in this assessment. Metal purchases in the country have been subdued this year because of rising supply and doubts about the country’s growth. This lack of confidence in global economic growth will affect all metals.  


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