Gold has soared over the last six weeks. I never thought about its impact on manufacturing because I have believed gold is a very minor component of any production process. However, over at Marvell Technology (MRVL), high gold prices are squeezing margins enough to make the company plan switching to copper. From Seeking Alpha transcripts of MRVL’s earnings call on August 18:
“The price of gold has increased from about $1,200 per ounce a year ago, to over $1,700 today. This has eroded our gross margin by about 1.5% in that period. We are transitioning to copper, but this will take some time.”
MRVL also noted that foundry prices have fallen more slowly than expected, and the company is looking for new fabs with better pricing.
Author disclosure: long GLD and GG
The strong rally in the stock market has included a strong rebound in copper prices. In “Copper Supply Squeeze Coming, Prices to Jump: Analyst“, CNBC notes that copper prices have reached a two-month high on the London Metal Exchange. Supplies are also likely to tighten as production from aging mines starts falling.
Disclosure: author owns FCX
In “Miners Bet on Falling Copper Prices,” the Financial Times reports that concerns over softening demand from China are driving copper producers to hedge more and more of their future output:
“‘For a while, hedging had become unfashionable. This has changed,’ said François Combes, head of commodities trading at Société Générale. ‘You have to go back at least five years to find the last time there was genuine hedging of this scale.'”
Currently, this seems to equate to a hedge of about 25% of production. This reported bearishness has not yet shown up in lower copper prices. An analyst in the article claims that copper prices have so far remained firm because producers are buying options instead of selling futures.
The robust recovery in copper prices has been led by Chinese demand. With other major economies experiencing sluggish growth, there is no likely buyer to fill any gap in Chinese purchases anytime soon. These dynamics imply that the volatility in copper prices could significantly increase in the near future without clear signs that Chinese demand will remain firm.
Proactiveinvestors reports that a deficit is growing in copper supplies in “Copper climbs after WBMS Reports on Growing Supply Deficit“:
“The WBMS said that for the first eight months of this year, their was a supply deficit in the copper market of 161,000 tonnes, compared with last year’s 16,000 tonne oversupply for the first eight months of 2009.
This growing oversupply is indicative of the major issue facing the copper market; ever growing demand for the metal as the global economy recovers, and increasing demand from China and India, is failing to be met as no new major copper production or mines are coming on line. This situation looks set to continue probably into the longer term, and suggests the very fundamental premise that copper prices will continue to climb while supply fails to meet demand.”
We will be watching copper prices even more closely as the U.S. Federal Reserve gets ready to flood the U.S. economy with more money. Assuming its impact is not already priced into the market, copper prices could really take off later this year and into 2011. Copper has already reached pre-recession levels.
(Originally appeared in “One-Twenty Two” as “Copper Defying Double-Dip Dangers“)
Copper has quickly recovered almost all its losses from the sell-off that began in May. Copper is potentially heading for fresh post-crash highs.
Of course, copper is now much more important to the emerging and developing markets than to developed economies like America’s, but I think this price recovery provides a remarkable contrast to current fears of double-dips and deflation.
One could also interpret this price action as anticipation of more money-printing and stimulus from the developed economies instead of a positive indicator of fundamental future economic health. An even more bearish interpretation of the chart might point to the potential head and shoulders formation and/or the marginal lower low in June. These technicals definitely work against copper’s case form this perspective. However, until copper fails at the April highs, I believe the 25% rally off the June lows should be taken seriously. Similarly, a break above those highs will be very bullish and suggest a continuation of the rally off the late 2008 lows.
As with any technical call like this one, confirmation of the signal must precede confidence. So, I am neither bullish nor bearish here on copper, just alert. For an example of how charts of copper’s price have been used to forecast potential economic danger, see “The Doctor is Calling” by Mike Shedlock at MISH’S Global Economic Trend Analysis (September 25, 2006). In this case, copper failed to confirm the bearish signals and instead proceeded to rise in price for almost another two years before finally peaking and then crashing.
After a correction earlier this year, copper has rallied and is now approaching its 52-week high. It appears that fears about a slowdown in the global economy have receded.
Copper prices have plunged so far in 2010. The 19% price drop from the peak set in early January is the largest price decline during the entire rally off March’s lows. Copper is now trading at prices last seen from August to October of last year.
(chart from StockCharts.com)
The dollar’s rise and monetary tightening in China have no doubt played a role in pressuring copper prices this year. This trend bears watching given inflation should remain tame if commodities like copper continue to fall.