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Michael Gayed: Is the Copper Crash an Opportunity or a Crisis?


And is it over? Ask the few bulls left who have logic on their side.

Pete Townshend used to crash chords and let the guitar feed back. He's overrated.
--Ritchie Blackmore
Copper has been getting a lot of attention as of late. A severe breakdown took place just over the last few days, and media outlet after media outlet is putting a spotlight on the metal. Because copper is so pervasive in industrial production and infrastructure building, the argument goes that its price movement can be indicative of future global growth expectations, particularly in China, which is, at the margin, the largest consumer of all.  In the case of China, copper (and other commodities) have often been used as collateral for lenders, which makes the potential for "margin calls" on the ground high when prices crater and the value of that collateral drops.
But is this really a cause for concern? With the exception of certain areas of the stock market, there is rarely a signal in severe collapses, which are more often driven by short-term liquidity pulses rather than longer structural issues. Copper has broadly underperformed US markets and has acted in a considerably more deflationary fashion than most other areas of the investable landscape. Global deflationary pressures have been undeniable, which makes the longer-term price action justified -- especially in light of the end of the commodity "super-cycle" of which China was such a driver.
However, what has happened in copper recently looks more like a capitulation-type move rather than one validated based on some new information coming into the market. Take a look below at the price ratio of the Global X Copper Miners ETF (NYSEARCA:COPX) relative to the S&P 500 ETF (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/COPX is outperforming (up more/down less) the denominator/SPY. 

Copper-miner underperformance is not news. This has been a long period of weakness, and the most recent behavior has been so sharp that it is worth considering that this is an oversold overreaction which, in turn, may be a buying opportunity.  While there is talk about a copper bear market after such a big decline, bull markets happen at the turn when no one believes the trend is over.  Yes -- momentum needs to stick for some period of time for most to be comfortable with the trade. Yes -- there are problems with the global reflation trade. But to think that the most recent breakdown in copper is a warning sign of something major disregards precisely how long the trade has been weak.
No one loved the gold miners in 1999.  Will we look back after a big run in copper miners years from now and say no one loved the copper miners in 2014?

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