The following investment recommendation from SumZero is a highly contrarian view on copper and why the price of the metal may be substantially inflated. Written by an investment analyst at a hedge fund, it provides institutional investors with an insightful and differentiated view on where the commodity may be heading.
iPath DJ AIG Copper Total Return Sub-Index ETN (Ticker: JJC) $42.29, May 25, 2010
Recommendation: Short
Executive Summary:
Both prices and inventories of copper are near historical highs. Economics 101 tells us this can’t last forever. Prices are elevated because investors are stockpiling the metal in China, but eventually this inventory will come back on the market, killing prices. The markets have yet to acknowledge these bearish fundamentals.
Fundamental disconnect:
Copper is selling for about $3.00/lb yet it costs less than ~$1.50/lb to produce. At the same time, global inventories are bulging no matter how you slice it. Adding these two facts together, a big red flag should pop up in your mind. Now consider that the forward curve – though in backwardation – levels out at about $2.75/lb, and that big miners like FCX and SCCO are trading at roughly 3X where they were at the bottom, when copper hit $0.60/lb.
This chart shows price and inventories (as reported by the Comex and London Metals Exchange) since 1970. Notice how the two have always moved opposite each other, except for the last 18 months:
http://www.copperjournal.com/copper_chart/cc.pdf ....