Copper is going up.

Copper is going up.

Hopefully you know by now. In fact, it would have been nice to know a month ago … or better yet six months ago (or even better yet two years ago!) …

That’s when copper started up. And today it’s challenging record highs after screaming higher so far this month. (The previous peak was early 2008.)

Copper Futures Weekly:

Naturally, we’re being told it’s time to buy copper. A Barclay’s survey has showed investors expect copper will be the trade of the year in 2011. Apparently Goldman Sachs is saying it too.

Every bull is citing a “tight supply picture” plus fairly strong demand.

Most recently these bulls have been affirmed by Chinese import numbers – the growth in imports from October to November was rather large.

At first blush, this month-to-month jump suggests Chinese demand remains strong. And the last 11 months to-date is signaling a record year for Chinese copper imports (which doesn’t really mean much for future prices.)

But keep in mind two things:

1) Imports in October, due to seasonality reasons, were the lowest for the year.
2) We don’t yet know the destination of these November imports.

Thus, the low base in October makes the growth in November look that much stronger. And then if the consensus begins to think China is hoarding copper – i.e. imports are sitting idle in warehouses rather than moving on through the process and making its way into infrastructure projects – then perhaps it says something about the demand that most everyone cites as being strong.

Indeed. It is investor demand that is strong. Demand from users of copper products is not – at least not at this time. *Remember the note from yesterday’s issue: Commodity loans for major speculators can be had at 1% or less according to Hoisington Investment Management.] Rising prices are attracting investors but keeping users away. From July to October, Shanghai bonded warehouses (where copper can sit VAT-free) saw inventories double from 150,000 metric tons to 300,000 metric tons.

This is not to say Chinese demand for copper is not solid – demand for scrap has improved, and we all know that China is still building (for better or for worse) stuff that needs copper – but it suggests there could be a lot of hype built into investors’ perception of the fundamentals (a.k.a. the market) right now. And because copper prices still have some bearing on global investor sentiment, there could be some hype built into other asset prices too.

After all, users of copper will soon run through their inventories and need to buy more regardless of the price. So we’re not looking over a cliff here with data on rising stockpiles. But this eventuality brings us back to a consistent worry in China and among investors: inflation.

Just as rising energy prices, due in great part to investment speculation, weigh on consumers, the copper situation represents a piece of the bigger puzzle: how much can the Chinese take before they reach the breaking point? We don’t know the answer. But it’s safe to say we lend gravitas to the social tensions issue in China and feel that might be the catalyst for a dramatic shift in policy and a consequential economic slowdown.

Nevertheless, the Australian dollar is at parity with the US dollar again today. It is moving on the same theme that seems to be moving copper. Investors are finding ways to shake off their concerns and take on risk. It is a mentality that we don’t understand, but one we must respect at the moment as price is always the final arbiter of the market.

It will likely require a conspicuous collapse in growth figures to significantly derail the risk appetite freight train that keeps blowing and going in the face of so many warning signs. And as China-loving perpetual commodity bull Jimmy Rogers says, and we paraphrase, if stocks go up commodities go on the same liquidity. If stocks go down commodities go up because of tight supply of commodities. Boy, now we know just how easy this game is. Thank you Jimmy!

There are several reasons traders make bad trades; most of them are psychological. One in particular: traders fear missing out on an opportunity to make money. Investing is the only monetary activity in our lives when we are urged to buy when prices go higher and sell when prices go lower. It is pure reverse retailing at its best. And the perfect backdrop for Mr. Market to pull his Joker card out of his back pocket.

We plead guilty and battle that urge all the time.
So we ask: might we be seeing this playing out on a grander scale, outside of short-term trading? Is current risk appetite simply a big build up of investors who are scared to miss out on more market upside despite the worrisome conditions so prevalent across many economies and governments? No doubt it is if you are one who believes mood is a driver of prices as much as prices are a driver of mood in their evil self-reinforcing madness, as we do.

If you get in on something with the mindset that you simply can’t afford to miss the opportunity, chances are you are probably late to the party. The formerly wildly spiked punchbowl is likely almost empty.