Dr. Copper Flashing Red Alert

The first red flag of 2013 was undoubtedly the spectactular gold and silver price drop starting April 12th. The ferocity and speed of the price decline were beyond any measure of what could be described as “normal”; we all remember the calculations which showed 6 standard deviations of the price decline (an event that statistically would occur once every 2 million years).

We have written repeatedly that our core assumption was the precious metals crash was the first sign of a bigger economic or monetary event to come. In fact, in our co-authored piece “2013 – Start of Seismic Shifts in Money, Metals, Markets” we made the following statement: “At this point, we have enough confirmation to accept that the gold and silver crash was the first shot across the board of what is to come.”

Here we are, some three months later, with another huge red flag. Now it’s Dr. Copper who shows a striking similarity with gold on its long term price chart. The major support point is at 3 dollar, and it is about to give away. Support goes back to summer 2010. The chart pattern between its highs in 2011 and today shows a structural decline with lower lows. The triangle on the chart is almost identical as the one on gold’s chart in March of this year.

copper_chart_july_2013

Furthermore,  the Commitment of Traders picture looks as extreme as gold. Commercials hold an unprecedented net long position. The huge risk lies in the extremely high net short position of large speculators (not seen for years, only temporarily at the dip of the 2008/9 crash). Courtesy of Sentimentrader.

COT_copper_july_2013

As we all know, the copper price (Dr. Copper) reflects the shape of global economic conditions. If it breaks down – which is very likely at this point – we can be fairly sure of a significant correction (or a mini-crash) in several other markets. Could it signal the mother of all crashes? Not yet, as the market is not giving enough signs of taking over control from central planners, an event which we expect to take place between 2014 and 2016.

Meantime, the following is unfolding at this very moment:

  • Crude oil (inflation indicator) is breaking down, failing to take out a multi-year high
  • US equities fail to break their all-time highs (clearly a lack of energy)
  • The Nikkei 225 has failed to test previous highs
  • Grains and food keep on heading south (a trend that started earlier this year)

The trend of declining commodity prices is not new; it has been THE trend of 2013 (except energy and some specific softs). However, up until now it appeared to be disconnected with the US / European / Japanese equities markets. We believe the above is an indicator of a trend change. We also believe it is indicative of the deflationary forces in the (global) economy no matter how strange that could sound in the midst of unprecedented (inflationary) monetary stimuli … more about inflation vs deflation here (featuring Mike Maloney) and here (featuring Jim Rickards).

We hate to say it, but we are obliged do so (in order to bring facts and figures in an unbiased way): all this does not bode well for precious metals prices. The nice run up in July seems to slow down. If the above events are the start of a new mid term trend (sort of a deflationary wave), then one should logically expect lower precious metals prices in the short to mid-term.

Long term, we remain convinced of the values of PHYSICAL precious metals, outside the banking system, no matter what the price is doing short term.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing