The 4th Wave?
Copper is having a terrible time. It fell 26¢ last week following a 28¢ loss the prior week and bringing Spot down to $3.76, its lowest reading since February 2021. To make matters worse, copper is now down 24% from the $4.93 record high, thereby putting it into bear market territory.
It’s difficult to rationalize this change of fortune as reported inventories held in exchange warehouses are near rock bottom lows, and we are told almost on a daily basis that there won’t be enough copper to support the green energy transition for years to come. So how do we reconcile this apparent dichotomy of falling prices in the face of predictions of demand exceeding supply? Very simply, we can’t, because logically one would expect the price to remain steady at the historically higher levels.
Necessarily then, there must be other forces at work that are weighing on the markets. And copper is not alone in giving up ground, as many markets have been falling of late. The high cost of energy, rising inflation and interest rates are fanning fears of a recession if not a period of stagflation, that seems to be taking a toll on sentiment and confidence, and correspondingly, the bullish narrative.
From a different perspective entirely, the Elliott Wave Theory comes to mind, with its tenets of how markets behave. Previous issues of the good Copper Journal delved deeper into the historical background of the Wave Theory, so we won’t repeat them here, but if you are not familiar with it and want to learn more, there is a vast amount of information available on line to explain it all.
The Elliott Wave Theory holds that markets move in a five-wave sequence, with three waves in the direction of the main trend, and two counter or corrective waves.
Broadly speaking, the Elliott Wave Theory holds that markets move in a five-wave sequence, with three waves in the direction of the main trend, and two counter or corrective waves. This applies to both bull and bear markets. The charts below illustrate our interpretation of the wave theory relative to copper on a monthly and weekly basis. The 1984 - 1989 and the 1999 - 2011 markets are of course completed, giving us the advantage of viewing these periods with our trusty 20/20 hindsight glasses on.
The current market cycle is still ongoing, and is shown in a weekly format. If our assumptions are correct, we have begun the 4th wave that will take the market lower. **That said, we would be remiss if we did not mention that back in September we thought wave #4 was beginning - in reality wave #3 still had a ways to go.**
When wave #4 is completed (whenever that may be), the 5th wave will commence, bringing the market to new highs. It’s interesting to note that wave #1 began at $1.94 in January 2016, and lasted 126 weeks as it rose $1.35, or 70% to reach $3.29 in June 2018. From there, the price fell for 93 weeks to $2.19, giving up $1.10, or 33%, and giving back 81% of the #1 gain. From the $2.19 low, copper then rose $2.74, or 125% over 102 weeks to $4.93 in March 2022.
We point this out to highlight that it takes years for market cycles to play out, and the changes that occur in the major trends are quite significant in both dollar and percentage terms. It’s been 16 weeks since the $4.93 high was posted, and the market has given up $1.17, or 24% through Friday.
If indeed copper is in the 4th wave, we could be facing a long and rocky road ahead.
John Gross is President of J.E. Gross & Co. a metals management and consultancy firm he established in 1987, to assist companies in their procurement of metals, scrap recycling, and price risk management. In addition to his consulting activities, Mr. Gross has worked with global leaders in the metals industry over the past 45 years. jegross.com