Copper goes into backwardation

As gold went into backwardation, now also copper starts going into backwardation.

We should see some upside in copper following this move into backwardation. But as opposed to gold, backwardation in copper isn't a good sign for the copper price. Meaning, if we see too much backwardation in copper (red curve making a bottom), you should expect a top in the copper price.

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Copper Contango Report Shows Weakness to Come

We thought that the contango was going back to backwardation, but lately we see a reversal again.

This is a not so positive development for commodities and stocks.

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Copper Contango Alert

Just a small reminder that the contango in copper is now dropping.

That means the copper rally is about to start now.

=> http://katchum.blogspot.be/2013/05/copper-contango-theory.html

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Copper Contango Theory

This page is created to monitor the experimental "Copper Contango Theory".

Historically, when the copper contango is high (red chart tops out), then we have a bottom in the copper price (blue chart bottoms out).

We see the red chart topping out, so we are in the progress of getting higher copper prices.

Additionally, when the commercials go long (purple chart goes up), copper bottoms out in the short term.

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Copper Contango Theory: Copper Bottoming Out?

It looks like the contango is steepening again, so that means that the price will likely go down. But the red chart seems to be topping out while the copper price seems to bottom out...

Chart 1: Copper Contango Vs. Copper Price

The COT report though is very bullish, so copper could go up in the future.

Chart 2: COT report Copper

Although the technicals are bullish, the fundamentals are very bearish. First we have the Chinese GDP below estimates. We have IMF GDP growth revisions to the downside. Record stock levels for copper. Stock markets on the verge of collapse.

We have a lot of contradictory indicators.

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Update: Copper Contango Experiment

I see a potential bottom in copper forming.

For one, the contango (red dots) have formed a top, which always coincides with a bottom in copper price (Chart 1).

Second, the large commercials are highly long on the copper COT report, which always coincides with a bottom in copper price (Chart 2).

Chart 1: Copper Contango Vs. Copper Price

Chart 2: Copper COT report

Chart 3 : Copper Price

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Copper Contango Update

I have the feeling that we are going to make a bottom in copper soon, the contango will at one point begin to reverse. We are at 1.4% contango to price ratio now, it will go up to about 2-5% before it will reverse. Even when we have a copper surplus and record copper stocks in China.

Chart 1: Copper Contango Vs. Copper Price

The CFTC data shows that copper will most likely go up because large commercials are long.

Chart 2: CFTC Copper

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Copper Contango Experiment

One of the data that can't be wiped out from my computer is the Copper Contango Experiment.

We see that the contango is widening each day, while copper price is declining. That is a normal thing.

Once the contango reverses, we will see a spike in copper. I don't know when it will reverse though.

Historically we need to go as high as 2-10% contango to mark a bottom in copper price as I pointed out here. Today we are at 0.04/3.5 = 1.1%. So there is still a ways to go.

Chart 1: Copper Contango

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Update: Copper Contango Experiment

The latest results indicate that the copper bull market is far from over. Contango keeps steepening (Chart 1) and the large commercials have covered their shorts in copper (Chart 2).

Copper will go higher. (as will the stock market probably)

I hope the record amount in copper stock won't put a damper on my contango theory.

Chart 1: Copper Contango

Chart 2: CFTC Copper

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Update: Copper Contango Experiment

Since 2013, the copper contango Vs. copper price correlation hasn't worked at all.

Both curves, blue and red are going up and down in tango, which is not normal. I wonder when the correlation will set in again, like it always had throughout history.

Chart 1: Copper Contango

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Correlation: Large Commercial Shorts in Copper Vs. Copper Price

Just for Discerning Admirer I looked at the CFTC report for Dr. Copper.

The same correlations as in silver and gold can be found here. When large commercials go short, we hit a top in the copper price. When large commercials cover their shorts and go long, the copper price bottoms out.

In the most recent February 2013 smackdown of copper we see that a lot of shorts have covered their short positions in copper. The red bars were very negative (a lot of commercial short interest), but those negative red bars have now subsided back to zero.

That means I expect that the copper smackdown has run its course for now.

This report, together with the contango report should give us an idea of the trend in the copper price. I can't wait to see the contango report for tomorrow.

I emphasize: this is only an indicator for short term moves. For long term moves you should always look at the contango report. The contango report says we are still in contango, which means the copper price will go up.

Chart 1: CFTC Report Copper

Chart 2: Copper Price

PS: I haven't found a correlation between LME copper stock and copper price yet.

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Update: Copper Contango Experiment

There is no stopping of the increase in contango in copper. So don't expect a correction in copper price soon. Probably the stock market can still go up for a little bit, due to this expansion of the balance sheet of the Federal Reserve.

Chart 1: Copper Contango

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Copper Contango Update: Setting up for Take-Off

Dears, I'm getting increasingly excited with the prospects in the copper market. The contango has yet steepened again, while the copper price is still in an uptrend (Chart 1 and Chart 2). Once the copper contango goes back into backwardation (red dots go down), the copper price will surge.

The copper price trend is in an ascending phase (Chart 2) and that tells me that stocks will rise (along with gold). Bonds will suffer greatly as the USD will plunge.

You can bookmark this post and remind me in a month from now.

Chart 1: Copper Contango

Chart 2: Copper Price

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Copper Contango Update

The contango on copper has been topping out as the LME stock level has also topped out. As copper goes back to backwardation, I see the copper price go up from here. It already spiked back to $3.68/lb which is the highest since October last year. And stocks are following nicely with this uptrend.

Chart 1: Copper Contango Vs. Price

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Copper Contango Keeps Steepening

There doesn't seem to come an end to it. The copper contango keeps steepening to 2.5% for 1 year futures, while the copper price remains steady.

If all goes as planned, we will see a huge copper and stock market rally in the future. Probably helped by good Chinese numbers. China's trade surplus surged 48% in 2012, its exports jumped 14% and its non-manufacturing PMI rises to a new high of 56.1. China has even so much money left over to double its gold purchases in November 2012.

If China does well, commodities will do well. The only asset that will underperform is U.S. bonds. Just recently, China's sovereign wealth fund had even opted to back off in buying U.S. treasuries and putting more into stocks and real assets.

Chart 1: Copper Contango Vs. Price

I would recommend people to continue buying gold, or rather: platinum. I predicted that platinum would surge against gold and it has come to fruition. Platinum has now reached parity with gold and I forecast that we will continue to go higher in platinum against gold until the historic platinum to gold ratio of 1.2 has been reached. The main catalyst is a 7% global platinum production cut recently announced by Anglo American Platinum.

Chart 2: Platinum to Gold Ratio

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Copper Contango Steepening

This week, the copper price kept rising with a higher contango, which is very unusual.

Something needs to happen soon, either the copper price is going to drop precipitously, or the copper price is going to shoot upwards with a declining contango.

I am still bullish on copper.

Chart 1: Copper Contango Vs. Copper Price

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Update: Copper Contango Experiment

Copper just made an all time 3 month high at $3.72/lb since late September 2012. It went up 6% in just one day on positive PMI from the UK, Korea, China, Taiwan and India. All of the PMI's are above 50 which indicates expansion in GDP growth. Meanwhile, U.S. bonds fell off a cliff to 1.84% yield on the 10 year treasuries. It's not long now before we will see an increase in the velocity of money and come into an inflationary period.

The rise in copper price also proves that the contango theory is valid.

But rest assured, there is much more to come in the following months as today's contango report for copper indicates that contango is still very high and hasn't dropped yet to backwardation, so I expect a further increase in the copper price.

Chart 1: Copper Contango

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2013: The Rise of Asia

We just had news yesterday that China's PMI went positive to 50.6, even by the standards of HSBC. This means that the GDP growth per year of China is going to increase. It is estimated that China will have a GDP growth above 8% in 2013.

I think that's going to be a certainty. We can already see that base metal prices are rising as I pointed out the correlation between China PMI and base metal prices in this article.

I believe the copper price is in break out mode (Chart 1).

Chart 1: Copper Price

The iron ore price is increasing again after one year of downtrending(Chart 2).

Chart 2: Iron Ore Price

Shanghai real estate prices are soaring to new one year highs (Chart 3).

Chart 3: Shanghai Real Estate

Even the Shanghai Composite has made a big shift upwards after a multi year decline (Chart 4).

Chart 4: Shanghai Composite

And all of this is because the U.S. is in big trouble due to the unsterilized buying of bonds through plain money creation out of thin air and expansion of the federal reserve balance sheet. This unsterilized buying is the most inflationary action the federal reserve can take. It is even more inflationary than the ECB's sterilized Outright Monetary Transactions (O.M.T.) buying of European bonds. That is because the money supply doesn't increase when you perform sterilized buying, while unsterilized buying increases the money supply. Then we have the fiscal cliff which will be an enormous burden on the middle class citizens in the U.S. It is estimated that the 3% GDP growth will at least slow down to 1% due to the fiscal cliff situation. And don't forget the debt ceiling, which is already taking its toll on government workers in the Pentagon.

This is why the money is flowing to other assets in this world (Asia) and even into the euro right now.

We need to acknowledge that the U.S. doesn't have any bullets left at this moment...

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Copper Contango Experiment

This week, the copper contango remained high, but the copper price fell. So I still expect the copper price to go higher as we move to backwardation. The copper contango theory will not be wrong.

As I write this post, I see the copper price go up from $3.53/lb to $3.59/lb.

The next step to extend this copper contango theory is to identify the tops and the bottoms of the contango. What are the upper limits of contango and lower limits of the backwardation?

Chart 1a: Copper Contango Vs. Copper Price

If we quickly look at history, we can see that in 1988, we got a price of $1/lb copper and a backwardation of around $0.2/lb. That's 20%. If we then look at another data point in 1996, we got a price of $1.25/lb and a backwardation of around $0.1/lb. That's 8%. Similarly, in 2006 we got 7%. For contango we have 13% in 1982, 7% in 1993, 2% in 2008.

So as far as major backwardation lows, we have a range between 7% and 20% and 2% to 13% for major contango highs.

Today we are at 0.6% (0.02/3.6) (mild contango), so we are neither in a low or a high range. We are now right in the middle between contango and backwardation, with a small bias to contango. So, to be really sure we have found a bottom in the copper price, the contango to price ratio should go to at least 2%. But when we go back to backwardation like in 1988, 1995 and 2006, the copper price should spike upwards.

Chart 1b: Historical Copper contango

There is one caution however, the LME copper stock levels are surging in exchange warehouses, which will put a cap on the rise in copper price and may even bring the copper price down.

Chart 2: LME Copper Stock

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Update: Copper Contango Report

For the people interested in my copper contango Vs. copper price experiment:

Yesterday we saw that the copper turned a little bit back into backwardation. This means that we will see the copper price go up in the future. As the copper contango turns back below 0 (backwardation), copper price should go up.

Let's see if this will happen, hopefully the contango theory is right. I'm still betting on a copper break out.

Chart 1: Copper contango Vs. Copper price

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