After closing lower for six consecutive weeks, and giving up $1.24 along the way, copper got a reprieve last week, with a reminder that a correction may be coming. It’s not limited to copper though, as all metals are ready for a bounce.
Whether we simply look at the charts and see the precipitous drop in prices over the past several months, or take the more technical approach using the Relative Strength Index and/or Stochastics, they are all telling us the same thing – that is, markets are very oversold.
From a different perspective, prices have fallen in the face of rock bottom inventories. Indeed, total inventories now stand at just 730,603 metric tonnes as the first chart in the link below illustrates, while the Base Metals Barometer has fallen to an 18-month low. As a point of reference, we have to go back 31 years to 1991 when stocks were last this low.
Logically, one is hard pressed to explain falling prices while inventories are also falling, but at the risk of repetition, markets are not always logical. That said, perhaps prices were responding to the sharply stronger dollar, or rising interest rates, or fears of a recession.
JULY 22 PRICE AND INVENTORY REPORT
In any event, looking at copper specifically, the Spot price closed at a record high $4.93 on March 4th, and since then it has declined $1.70, or 34% to the recent low of $3.23 on July 15th. Assuming a simple 50% correction from the low, we are looking at a potential bounce of 85 cents, which could take copper back to $4.08. Using this same approach, the other members of the nonferrous team could see prices also enjoying a bit of a correction. Aluminum could revisit $1.40; lead - $1.00; tin - $16.08; nickel - $15.27, and zinc $1.68.
Precious Metals
How about the precious metals? Silver was $28 in June of 2021, but has fallen almost $10, or 36% to about $18.00. A 50% correction here could bring silver to $23. Likewise, gold could see $1,840 again. Interestingly, copper, aluminum and nickel are at or close to key support lines, as is the Base Metals Barometer, representing all nonferrous metals. And take a look at the precious metals – here too you can see all of them at important support lines. The S&P 500 rose to a record high 4,797 in January, but fell to the recent low of 3,667 last month. A 50% correction here could bring it back to 4,230. A long shot for all of this? Maybe, but we’ll see.
Why Would markets Correct?
Why would markets correct? Some people will see the lower prices providing a buying opportunity, relative to where they were. Others will cover short position to take profits, or limit losses. While still others will look at the fundamentals, to include the nearly empty exchange warehouses and conclude that prices are bound to rebound.
On the other side of this correcting coin, headlines, news reports and various commentators are telling us on a daily basis that a recession is right around the corner, and the Fed is going to raise interest rates again to continue the fight against inflation. That’s a tough one. We’ve already seen a slowdown in building and real estate activity, and many commodity prices have also declined. Further, announcements of job cuts in the tech and crypto industries have been made, along with Ford advising that some 8,000 jobs will be eliminated.
Anyway, if you believe sharply higher energy prices are associated with recessions, or the 2- and 10-year inverted yield curve predicts a recession, then one is on the way. The remaining questions are: how long and how deep?
About the Author
John E. Gross
President
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.