Asia
Copper Hits Above $14,000 Leaving Investors in a Dilemma
Copper prices have leapt to above $14,000 a tonne after a brutal rally on the London Metal Exchange in speculative and short-covering buying. The uptick was the largest one-day gain since 2008 and has investors debating whether to chase prices higher or stand back. And while funds are still long, there is very weak physical demand, particularly in China. Analysts are also cautioning that volatility is likely to step up, and this might be followed by a correction like the one around the Lunar New Year trading holiday.
Copper soared to new records, surpassing $14,000 a tonne on the London Metal Exchange. The sharp rally has been fueled by speculative buying and short-covering, leaving investors to decide whether they should chase prices higher or take a step back given signs of poor physical demand, particularly from China.
Copper Reaches Record After Largest One-Day Gain Since 2008
Benchmark copper on the London Metal Exchange surged 11 to an all-time high of $14,527.50 a metric tonne. The gain was the largest single-day increase since November 2008, traders said.
The rally was driven by speculative buying and short-covering, with the price momentum attracting others to join in; prices moved past where many analysts believed they would reach before buyers started pulling back.
2 Options For Investors: Momentum Or Risk
The steep ascent of copper has put investors in a quandary. Striving to push prices ever higher could yield gains so long as the rally has life, but it raises risks of swifter losses if the market flips.
And a lot of the funds are retaining bullish positions in physical commodities, including copper, as a hedge against a weaker dollar and lingering geopolitical tensions. But unlike gold, copper relies heavily on industrial demand. At the prices being commanded today, that demand is already beginning to look strained, sparking questions about how long the rally can persist.
Short-Covering Fanning The Flames Of The Rally
The rapid rise caught investors who had bet on copper prices falling on the wrong foot. Many had anticipated that prices would come under pressure from immense storage levels and lacklustre physical demand.
Instead, short positions were unwound at lightning speed, exacerbating buying pressure and driving prices even higher. This sort of move can amplify price gyrations, especially when liquidity dries up. Now, some institutions will have to cut exposure and that could leave the market vulnerable coming sessions.
Red Flags - Volatility And Demand Risks
Extreme price moves often cause banks to retreat because of risk limits, said Dan Smith, managing director at Commodity Market Analytics.
“They start to drop out when things go exponential,” he said of many banks. “The volatility just makes it terrible to attempt to trade it.” High prices, he said, could disrupt demand and make the rally difficult to maintain, particularly in the short term.
Analysts Compare Rally To Mid-2000’s Bubble
The current move is similar to the gain in copper between 2004 and 2006, said Alastair Munro, the senior base metals strategist at Marex.
Previously, heavy buying tied to industrial growth in China had sent prices sharply higher at that time, followed by a retreat. A pause could be in the offing once month-end flows abate, Munro said. The approaching Lunar New Year holiday in China is a potential catalyst as trading activity ebbs and liquidity declines.
The Lunar New Year Could Offer A Test Of The Rally’s Strength
Markets are now focused on whether copper can continue to hold above $14,000. The Shanghai Futures Exchange will cease night trading on February 13 and for the Lunar New Year holiday.
Thin trading over the holiday may make the market more susceptible to bigger swings. And if demand stays flaccid, prices could have a hard time remaining at their current levels, analysts say. For now, copper’s rally is causing a headache for investors, who face strong momentum along with increasingly expensive chances of a slide.
KEY HIGHLIGHTS
- Copper hits new record highs above $14,000
- Biggest one-day gain since 2008: prices leap 11%
- Physical demand is weak in China
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