Dr. Copper’s Summer Cold $HG_F $FCX

Dr. Copper is feeling under the weather. But will his ailment prove fatal?

By LIAM DENNING

The charts don’t look good for the metal widely regarded as having a Ph.D. in economic forecasting. Monday’s 3.1% fall in the Comex front-month copper contract, to under $4 a pound, pushed it back below the 200-day moving average, a closely watched support level. Worse, the shorter-term, 50-day moving average has been dropping pretty steadily since late February. The dreaded “death cross” looms, when the short-term average drops below the long-term one, portending sustained weakness.

Bloomberg NewsBeijing’s efforts to rein in inflation should serve to constrain copper demand.

Any prognosis must rely on more than charts, however. Copper’s last death cross, just under a year ago, didn’t bury the metal. By September, the 50-day average had moved back above the 200-day indicator, as copper entered a seven month bull run. By mid-February, the copper price had risen 54% and surpassed its 2008 peak at the height of the precrisis commodities boom.

That last run upward, however, coincided with a couple of things. First, the Federal Reserve’s second round of quantitative easing, or QE, drove U.S. real interest rates decisively lower. By weakening the dollar and reducing the opportunity cost of holding nonyielding assets, this made metals a relatively attractive investment. Second, Chinese inventories of copper were restocked during the second half of 2010, according to Deutsche Bank estimates.

Looking ahead to the summer, further U.S. monetary loosening is a debatable prospect. If QE3 fails to materialize, that would undermine the case for holding commodities.

Chinese demand is also key. Apart from the usual seasonal slowdown, Beijing’s efforts to rein in inflation and deflate a real-estate bubble should serve to constrain copper demand in its biggest market. Monday, HSBC released index data showing Chinese manufacturing expanding at its slowest pace in 10 months. The twist is that, if QE3 does materialize and drives the dollar down again, that would exacerbate China’s inflation problem because of the yuan’s peg to the greenback, putting more pressure on Beijing to tighten.

The doctor may take to his bed for the rest of the year.

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FULL ARTICLE AT WSJ.COM