First, a mea culpa. In October of last year I wrote a bearish piece on copper, suggesting that copper was in danger of falling and losing its Ph.D in economics. The reasons were a sharp rise in bullish sentiment, a lopsided Commitment of Traders report and the rise of investors with no interest in the industrial commodity other than to ride its coat-tails to higher ground.
In fact, according to Bloomsbury Minerals Economics’ analysis, copper’s notional value – stripped out of the excess demand from investors who wanted to hoard it for future gain – was about half the then price.
The thesis may have sounded airtight but the market had other plans. Copper, instead of falling, rose 20% – easily outpacing its more famous cousin, gold.
But the scenario doesn’t look that much different now compared to several months ago. Unlike gold, sentiment for copper continues to be excessively bullish by various measures. The Commitment of Traders report showing a similar gap between the ‘smart money’ commercial traders and the retail fast money small speculators. And the trend of non-industrial or investor demand for copper that Bloomsbury was bemoaning is about to get a whole lot stronger.
The old adage on Wall Street is to feed the ducks when they are quacking. BlackRock and JP Morgan are about to introduce two competing products that will tap demand by investors for an easy way to hold physical copper. Framed on the successful iShares Gold trust ETF (GLD), the iShares Copper Trust ETF and the JP Morgan Physical Copper Shares ETF are set to debut soon on Wall Street.
Right now, the only way for investors to hold copper is the futures market and the iPath Dow Jones-UBS Copper Subindex Total Return ETN (JJC) which is a debt instrument that tracks Comex copper futures. The challenge of a futures based product is that tracking is affected by contango or backwardation – a physically backed ETF doesn’t have these issues. These two new ETFs will allow investors to hold copper just as easily as they hold any other stock or bond in their portfolio with extremely low cost and no tracking issues.
The funds will start out relatively small relative to the copper market. But if they follow the same script that the behemoth Gold ETF (GLD) fund did, they will soon balloon to take up a huge proportion of the copper market and push copper prices even higher. Of course, as it becomes easier to buy, it will also be easier to sell.
Since these two funds will be able to channel the burgeoning demand for copper from both retail and institutional sources, it is possible that we are looking at a new type of market. A market driven and dominated by a growing herd of quacking speculators – one which is defined as a speculative playground than the quaint supply and demand forces for an industrial metal.
Also relevant, check out this interview with Bart Chilton, a commissioner at the CFTC, about the “massive passives” in the commodity market.