Montreal, Canada

Just a few months ago, the world’s most widely followed industrial metal was turning over, suggesting a new global bear market was approaching. Dr. Copper is often regarded as a leading global economic indicator as the metal is among the most sensitive demand component tied to any cyclical recovery or decline.

China is the world’s leading importer of copper and consumes almost 40% of total supply.

The infamous “death-cross,” marked by the convergence of short-term and long-term moving averages (see below) signaled trouble ahead for copper and world markets back in May; but since August, copper has staged an impressive recovery and now trades comfortably above its 50-day and 200-day moving averages.

To confirm Dr. Copper’s recovery, we need to see a sustainable rise in bond market interest rates, which would confirm the cyclical trend of renewed economic growth and, therefore, higher rates. That hasn’t happened yet.

Benchmark ten-year Treasury bonds still yield south of 3% and the yield curve – or difference between short and long-term rates – is still flattening. This price action doesn’t portend to a cyclical recovery for the global economy. Instead, it implies a slowdown is underway.

Another important variable that should support rising economic activity is the inflation rate.
U.S. CPI sits at just 1.1% over the last 12 months – hardly a threat — suggesting a strong recovery remains elusive. Indeed, the Fed wants to grow inflation as it shortly introduces another round of quantitative easing this fall. Typically, strong recoveries have followed sharp declines in output. But not this time.

The move we’re seeing into commodities now probably has more to do with a falling U.S. dollar and weak global currencies vis-à-vis gold supported by the lowest rates in almost sixty years. Investors are hedging their exposure to hard assets or raw materials at the expense of paper money. Even the strongest currencies are falling lately: the Japanese yen and the Swiss franc.

I’m not convinced a sustainable global economic recovery is the driving force behind copper’s recent turnaround. Bonds provide better clues. Until interest rates really ratchet much higher, copper’s recovery looks suspicious.