Copper is among the most practical commodities in the world, as the industrial sector relies heavily on the material for a number of uses. Not only does it have wide applications in the industrial world, but the economic space as well. With the nickname “Dr. Copper,” the reddish-brown metal is often used as a proxy for the global economy as a whole, precisely because of the demand created by the industrial world.
But as all eyes have remained fixated on this commodity, a clear, downward trend has emerged, worrying economists and investors alike.
Copper Prices Take a Hit
2013 has been a tough year for copper, as the metal reached 20-month lows after peaking in October 2011. With copper dropping nearly 20% on the year, the commodity has entered a technical bear market and has gotten a lot of investors talking. Unfortunately, the macroeconomic factors that had once bolstered copper have now turned against the metal, putting major pressure on prices.
For starters, copper prices experienced a strong rally from 2009 to the end of 2011 as the global economy worked its way from the depths of the Great Recession. As prices continued to rise, miners and producers began to ramp up their copper output, flooding the market. Now, it is expected that 2013 will see a surplus of the metal as production seems to be outpacing demand; this also has many economists worried that a copper glut will soon follow.
Another major hindrance on the metal has been the slowing economies of regions that have long been known for their hefty demand. Europe as a whole and China are the two largest consumers of the metal in the world (with China having the highest-single country demand). Both of these economies have been notably struggling in recent months as evidenced by the European Central Bank rate cut and a declining Performance of Manufacturing Index for China. While the US is holding its own as far as the economy is concerned, it cannot hold up the copper market by itself.
Bear Market Near?
Dr. Copper seems to be growing more and more ill by the day, prompting many to call for a bear market. Of course, while many take copper as a telltale sign for the economy, it quickly becomes a chicken-or-the-egg argument. It has been quite clear that China’s growth has been screeching to a halt and that a number of other economies around the world have been sputtering. So is copper really signaling a bear market, or is it simply reacting to the trends that have been developing for some time?
Either way, it is clear that there are a number of external factors that make today’s markets worrisome. Even if the US is able to maintain composure, further hits from the eurozone or China could have unwanted side effects. Whether you choose to keep an eye on copper or data from around the world, there are flashing signals of a bear market that traders should keep in mind.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.