The most heavily anticipated Federal Reserve meeting in the last seven years turned out to be a non-event. No change. The ticker flashed across the bottom of the screen, The Federal Reserve Board has left interest rates at 0. No change.
There are lots of variables factored into their decision but the end result is that they simply didn't feel our economy was ready strong enough to withstand even the slightest of interest rate increases. Assuming they're right, what do we make of copper's recent rally?
Clearly an expanding economy will need more copper. Apparently, the commercial traders weren't too keen on this idea as they've been net sellers in each of the last four weeks. Furthermore, the Commitment of Traders report reveals a unique imbalance that bodes poorly for copper's future prices.
The copper market has grown tremendously over the last ten years. We've noticed this as China has become a full player in this market. Whether this is due directly to Chinese influence or is the result of middle men, the open interest numbers don't lie. The average open interest in the copper market has grown by about 20% over the last ten years. Some of this is attributable to the commercial traders who are the copper miners and refiners in this market but, most of the growth has come from the large speculators.
In fact, we've now seen a couple of instances where the size of the large speculator position is actually larger than the commercial trader position. We first noticed this in April of 2014 and the large speculators were dead right. Each of the three observances since April of 2014 have been dismal speculative failures. We are currently witnessing the fourth observance of this changing landscape as large speculators became more bullish than the commercial traders beginning in early July.
We believe that this market imbalance will resolve itself towards the commercial traders' anticipated direction. We expect this to be lower as they've been net sellers in each of the last four weeks. Furthermore, the recent rally has pushed the copper market into overbought territory. We believe this rally is a selling opportunity and that the swing high for this move was made Thursday, Sept. 17 on the heels of the Federal Reserve Board's failure to raise rates. While there's argument over whether this is inflationary in the long-term is irrelevant as our focus is on the industrial nature of copper in a weak global economy.