Montreal, Canada

The LME, or the London Metals Exchange, copper price continues to deviate from the Shanghai Futures Exchange copper price. Speculators are taking aim as the price divergence suggests a mini-bubble might be developing in the copper market after an explosive rally.

Over the last few months, inventories on the Shanghai Futures Exchange have climbed while those in London have declined. When this sort of anomaly occurs, commodity experts point to speculators like hedge funds whom strive to ride a trend to its fullest, usually with leverage.

If the trend in inventory accumulation in Shanghai is correct and if the Chinese have indeed stockpiled sufficient quantities of the red metal, then a severe short-term correction seems imminent.

Copper prices recently hit a new high earlier this month and have gained 42% since last February and up 38% alone since the Fed’s QE II announcement in August.

Speculators looking to make a quick buck on a correction can short copper futures options or buy puts against Freeport McMoran Copper & Gold (NYSE-FCX).

If there’s one thing we’ve learned about the Chinese over the past decade it’s that they don’t chase industrial metals prices to the Moon. The Chinese typically stockpile amid deep corrections.

This time it’s unlikely to be any different, especially as the People’s Bank of China continues to gradually drain excess liquidity from the banking system to slow the credit cycle.