Copper and China = Directional “twin indicators”

What about copper? By Harold AGJ Davis,    www.prairiecropcharts.com  Winnipeg, Manitoba

As a key industrial commodity, copper prices are very sensitive to pressure changes in economic activity. Thus, any copper market analysis also encompasses an economic insight. What is copper telling us now?

Copper’s price responsiveness to economic expansion and contraction over the past half century is well understood. Yet, in the past fifteen years or so, copper’s moves have not corresponded as closely to changes in American industrial production and construction as they once did. It seems that copper’s drivers have evolved and demand swings are no longer dependent upon the service sector dominated American economy. Rather, the capital spending, infrastructure development and booming construction of Asia, China in particular, appear to have taken over.

To see the situation graphically, readers are advised to print a long term monthly copper chart complete with either a MACD or 12 month ROC indicator. Then visit the Federal Reserve Bank of St. Louis’s FRED Database and print both an annual current dollars chart of Gross Domestic Product for China and a percent change from year ago version. Discover the visual match-ups and you will agree that, since 1993, Chinese GDP and copper prices enjoy a great deal in common. So, the question about copper’s future also becomes: Whither the Chinese economy?

China’s economic prospects are beyond the scope of this short essay, but another potentially relevant fundamental available in the FRED Database is a percentage change from year ago graph of M2 for China. Quantitative measures of liquidity like M2 money supply reflect the interplay of monetary policy, credit, and the transaction demand for money within an economy. In the case of M2 for China, the recent growth rate remains positive but has turned down. In fact, it is now testing 2015 levels which were the lowest since 2000. This is a worrisome harbinger that should be watched closely for near term financial implications that could ripple around the world.

The significance of the current situation is obvious. Consider copper’s current chart position wherein prices are sitting on a major uptrend that dates back to 2002. If the trend is violated, the result may be a price plunge to test underlying support in the $1.40 – 1.50lb range. More importantly, it would signal a powerful Asian/Chinese business contraction. In contrast, a recovering China could cause currently low copper prices to be treated as the end of a healthy correction that coincides with cycle lows at the beginning of new bull market and business expansion.

Which way will copper and the Asian economy go? We may not have to wait much longer for a signal.

Harold AGJ Davis is the Author and Analyst at www.prairiecropcharts.com