smart-money-report.com Blog

From Minyanville:

Conventional wisdom, by which we mean “previously reported data from Chinese government sources,” was that China’s demand for copper actually declined in 2006. If, by “declined,” one means “surged by more than 15%,” then conventional wisdom is correct.

China’s copper imports in December surged by 55% year-on-year, the Beijing-based customs office said yesterday.

Most believed China’s usage of copper actually declined in 2006, but the latest government figures show that simply isn’t the case thanks to the surge of buying December.

Of course, if you’re the world’s largest consumers of copper like China, it certainly doesn’t hurt to fool speculators into thinking you’re done buying.

In December alone the price of copper fell more than 9%.

Year-to-date copper was down 7.5% heading into today.

Adam Hamilton makes the point that the CRB index is so dominated by oil that the weakness in the CRB is simply a reflection of the weakness in oil. Good point.

From Ted Butler:

Silver inventories can’t go lower than zero. As we approach zero, the deficit must, by definition, end. Please let me repeat that – the 60-year continuous structural deficit in silver is probably over. But the damage to world inventories is done and that damage is irreversible. Just as we can’t turn the clock back 60 years, we will never witness the world inventories of silver that we saw in the past. Those inventories are history. And, as luck would have it, just at the precise time the silver market’s structural deficit is ending, a new potent force has entered onto the scene that promises to effectively extend the impact of the deficit. That’s investment demand, and specifically institutional demand created by the new silver ETF. The 119 million ounces of silver purchased by the ETF has the same price impact as a huge surge in industrial demand, or an equivalent fall-off in mine production.

There are some who think so.

This isn’t good news for the bulls.

Paul Farrell say there are too many bulls and too few bears.

If you’ll scroll down to the last part of the Aden Sisters’ post, you’ll find this gem:

We’ve shown the 200 year commodity cycle on Chart 2 before, but it’s worth repeating. Note that commodities have had five mega upmoves in the last 200 years and the sixth one is now underway. On a big picture basis, you can see that the current commodity rise is still young compared to previous upmoves and the upside potential is wide open. Each commodity upmove has also coincided with a war, as is the case today.

The current rise, however, is more powerful due to the massive demand for commodities coming from China, India and the emerging countries, compared to the limited supply. This will surely continue to keep upward pressure on commodities in the years ahead.

Plus, the global financial landscape has changed. Competitive devaluations are the way today as countries compete to sell their goods at the best price. Globalization is in full swing and global imbalances are happening, which is why gold, the ultimate currency, has risen sharply in all currencies over the past year (see Chart 3 as an example). Gold tends to rise when the U.S. dollar falls. But when gold rises in all currencies, you know the bull market is real and solid.

Roland Watson says that silver is a gold derivative. I’ve never thought of it excactly that way, but it’s an interesting concept.

From Dick Arms:

After a very strong up year, the volume quieted on year-end, as the Dow hovered just below all-time highs. With the first trading day of the new year, prices took off and volume expanded. It was at levels never seen before, and the bullishness was endemic. The Dow went to new highs. It had been seven years, almost exactly, since the Dow had made a long-lasting top.

Recently, the markets pushed slightly above that earlier seven-year high. They had been in a wide sideways consolidation ever since that secular bull market had ended seven years earlier. The propitious beginning to the new year with a move to new highs was widely heralded as the start of a new bull market.

When was the above written? 1973. But it might as well have been written today.

Always be skeptical of conventional wisdom. So what’s the conventional wisdom on copper right now? Falling copper and commodity prices are an indication of a slowdown in economic growth. Jeff Miller points to the following from Market Watch that has gotten a lot of attention:

A sell-off in commodities — from copper to crude oil — over the past few sessions is telling some veteran market watchers that a slowdown in economic growth, likely one of considerable magnitude, is already underway.

The problem is that all the talk about a decrease in demand focuses on U.S. numbers. The secular bull market in commodities has never had anything to do with U.S. economic growth. Having said that, there is a Bloomberg article that — if you just read the headline — would seem to indicate that China demand is falling. However, as Miller points out the article is talking about 2006 data. What about 2007? From the “Economic Times”:

China’s actual copper consumption may grow by 3 to 5% this year, and by as much as 5% next year, Shen Haihua, vice-president at Maike Futures Co, said. Chinese copper producers and consumers have de-stocked 75,000 tonnes of the metal in the first 11 months of this year, while the State Reserve Bureau has disposed of 200,000 tonnes, Ang Xiaodan, an analyst at Minmetals StarFutures Co, said.

As far as the technical weakness is concerned, Miller makes an important point:

A further careful reading of stories about falling copper prices reveals that traders were responding to reports on U.S. economic data!! One trader is quoted as saying “the charts look terrible.” If this is true, the prices are not really a leading indicator. The prices reflect traders looking at the same economic reports we all are seeing [emphasis mine].

You have to look beyond the headlines. Whatever is in the headlines has already been discounted. Commercial traders — very aware that copper is supposed to be a leading economic indicator — are buying copper, not selling it. You have to ask yourself what do they know that those who are just regurgitating conventional wisdom don’t know?