From the October 01, 2009 issue of Futures Magazine • Subscribe!

Gold and copper: A tale of two metals

Much like the energy markets, the weak dollar is also a huge driver for metals markets, especially gold. For copper, the main factors are the weaker dollar, industrial demand and demand coming from China.

“The dollar’s going to affect all of the metals. Market participants should keep an eye on open interest. With risk appetite increasing, we’ve seen investors wanting to gain more exposure to metals that track economic recovery, especially as we move to the end of the year,” says Catherine Virga, an analyst at CPM Group.

Many analysts expect gold to go higher as the dollar gets weaker. However, David Abramson, managing editor of the commodity and energy service at BCA Research, says economic stimulus plans could change that longer-term. “The conditions that are normally negative for the dollar and positive for gold are there for the next six to nine months, but beyond that, it’s a very tough call. If the dollar falls, that tends to benefit gold, but [a new factor is] a systemic concern that the authorities will have to undertake policy measures that are different than anything they’ve had to do since the 1930s. That allows the dollar/gold correlation to break down. If the [policymakers] start to take risks, it won’t be just a dollar story. You could have a situation where there’s a flight to quality and emerging market currencies and commodity currencies don’t do well but gold does just fine,” he says.

Abramson expects gold to go to $1,200-$1,300 per ounce, a 20-35% gain, by the end of the year. “It’s a traditional cyclical bull market. We’re not looking for a blow-up in the banking system. Weaker dollar, stronger gold,” he says, adding that gold will appreciate in euro and yen terms as well. “It’s a plentiful liquidity story. Gold will go up in dollar terms because the dollar is weak, but also because there’s a lot of liquidity out there.”

Growth in China was the story for copper for most of 2009 and recovery in the United States, Japan and Europe should play an important role in copper markets through the end of the year. “China is a third of global demand, and they’re going to pick up a fair amount of slack in the Western world. We have seen Chinese demand offset some of the weakness this year and from this point, we’ll see Chinese demand ease. Now it’s a question of whether or not there’s going to be enough demand to absorb the built up inventories in China,” Virga says.

George Gero, vice president of global futures at RBC Wealth Management, says the recovery in the economy has helped copper. “We’ve reached a $3 (per lb.) area for copper and as we go forward you’re going to see more and more volatility because the higher the price, the bigger the possible volatility as we think about whether the Chinese and the other BRIC countries will need copper for infrastructure going forward. Trading in China has been huge, and we expect that to continue. If the economy continues to improve, you’re going to have better housing starts and you need copper for that,” he says.

Abramson says that as long as U.S. copper demand isn’t collapsing, then copper can do well because China has been the real marginal buyer of copper. “Over the last six years, China has accounted for [a large portion] of the increase in copper demand in the world. If U.S. housing and car demand is collapsing, it’s not good for copper, but if it’s ebbing or going nowhere, you have to look at what’s going on in China.”

A rise in manufacturing has been good news for copper, Virga says. The U.S. ISM for July is at 48.9, up from 32.9 in December, while Japan rose to 50.4 in July from 29.6 in January. “The manufacturing index has corrected, so there has been a turnaround in manufacturing and we’ll see some growth” in the U.S., she adds. Traders should watch supply trends for both metals. “The supply trends for copper have been bullish in the sense that there are constant strikes and wage settlements. We’ve gotten used to these surprises and if they stop, it could be negative for copper,” Abramson says.

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