Asset AllocationJune 13, 2023

‘Doctor Copper’ May Be Signaling an Upturn—for the Metal and the Economy

Traders in the beaten-down commodity, an economic bellwether, are taking long positions in its futures.

Reported by Larry Light

Only one commodity carries a professional honorific: “Doctor Copper.” It’s as if this base metal has a Ph.D. in economics and can call turning points in the economy. The good physician’s latest diagnosis, if history is any guide, suggests things are looking up, both economically and for copper itself, a key component of manufacturing.

Copper certainly could use a good upside. It changed hands at $3.75 per pound as of Monday, down 25% from its record high in March 2022. This is an industrial metal, so persistent predictions of a coming recession have hurt it. But with a whiff of economic optimism in the air—as witness the S&P 500 entering a new bull market—copper has nudged up in the past two weeks.

Perhaps even more significantly, copper traders lately have taken net long (that is, positive) positions in the commodity’s futures contracts—a good portent, according to the McClellan Market Report, a highly regarded financial newsletter. The publication noted that commercial copper traders are net long “to a pretty large degree, which means that they think copper prices are low right now and worth locking in.”

In other words, the metal’s prices likely are on the road to rebounding. Rising demand, and thus prices, for copper has long been linked to economic growth. Industry buys tons of copper for goods such as wire, pipes and machinery. When copper pulls back, the economy tends to contract.

Tom McClellan, editor of the newsletter, wrote that the positions of commercial traders—who, as opposed to speculators, work for companies that use copper—are a pretty good harbinger of what lies ahead. These traders, he wrote, are “the smart money.” By contracting to buy the commodity on the low end, they profit once the price shoots up in coming months (at least, that is what they hope will occur).

McClellan wrote that their actions, as collated weekly by the Commodity Futures Trading Commission, usually foreshadow the movements of the Institute for Supply Management’s benchmark, known as the Purchasing Managers’ Index. At present, the PMI, a monthly survey of the folks who buy materials for manufacturers, is down almost 10% over the past 12 months.

McClellan pointed out that “the monthly PMI data are released with a lag. So we can get a clue ahead of time about what the PMI data are going to look like” from traders’ wagers. He argued that the “implication of the big net long position that the commercial traders are holding now in copper futures is that we ought to see a price rebound for copper, part of a rebound for the economy.”

To be sure, the commercial traders are not always prescient. “Occasionally the message from the copper futures data gets it wrong, and the correlation goes astray for a short time,” McClellan stated. He also noted that there is no guarantee that the traders’ maneuvers will predict what ends up happening.

In his view, “extreme bullish or bearish sentiments can persist for a long time before they finally decide to matter.” Further, “copper prices are not required to start upward now just because we notice this condition [traders’ net long positions], but it has proven itself over time as something which matters.”