Commodities bull over? Gimme a break!

violent peace....blah blah blah...buy it right now...blah blah blah
we are the world...we are so huge...blah blah blah
johnny can't read...blah blah blah...I can't see...blah blah blah
tuna on white...guns all night...blah blah blah

James Newell Osterberg Jr, 1986

Bubble this.... bursting that.... it's all over for commodities.... US recession the death of copper... buy financials and sell metals (the latest fashionable clarion call, you might have noticed)...

The amount of words written by people who do not have the slightest clue about the commodities market is quite incredible and is nothing but useless noise. If these people want to advise you into their favourite financials sector, well fair enough, but why you have to sell your commodities to go into financials is beyond me. Aren't you allowed to hold both?

The constant chatter neurosis of the market can suck the unsuspecting investor into thinking whatever at any minute. A new variant is how the bottom is going to fall out of spot copper as soon as the Codelco strike is resolved....oh gimme a break, yeah? Sure, this blah blah blah can move the short term market and make a buck for the sharp trader, but to make the serious money you need to see a little further than tomorrow. And to underline what the market really thinks of the future of base metals, have a look at the future contracts (yeah, say "DUH" if you like, but those that think they know better often miss this completely).

click to enlarge

To help read the chart, the X axis shows months out from today, and the Y axis shows the price for copper in US dollars per metric tonnes.

So what do we notice? Yeah, the curve goes down as time goes on. A metric tonne of copper is selling at U$7,700 for July 2010 delivery. In old money, that's U$3.496/lb right now. So to keep the argument simple, if you are a copper producer you can go to market with the wares you'll produce in 2 1/4 years' time and sell it at a raging profit. Is that clear?

Well if not, note that opportunity cost plays a part in the lower future price. Keeping to a simple model for the sake of demonstration, as a copper miner I could sell my 2 1/4 year copper production at $3.49/lb and with that money earn some nice interest. If a bank gave me 5% APR on that, my U$3.49 would turn into U$3,89 (a spit away from today's spot price, which is not a coincidence).

So tell me again, what is it that the commodity bears want us to believe about the US recession dragging down commodity prices for the next two to three years?

But that's not all, of course. Let's note that copper producers are turning their backs on hedging their product. That tells me that even though producers can lock in near record prices for the next two years, they'd rather let their bets ride. And I don't know about you, but I think the fact that producers large and small and all over the world are closing their hedge books shows the confidence about future prices from the people that really matter; the copper miners.

I do tend to focus on copper, but as the traditional leader of base metals it does tend to show the way for the rest of the complex. But the point is simple; if the traders moving thousands of copper contracts a day price copper with no significant drop, and the miners who make put the metals on the market don't want to lock in that U$3.50/lb, why should you think any different? And I haven't even started on the sustained Chinese demand and how last week's U$3.77/lb was snapped up by bargain hunters.

So if you really want to roll the dice and buy some financials right now, I wish you good luck (I’ll wait until things are safer, personally). But why turn your back on guaranteed high profits from companies such as Freeport McMoRan (FCX), Southern Copper (PCU) or the high likelihood of continued buyouts in LatAm copper juniors, with Inca Pacific (IPR.v), Candente (DNT.to) high on anyone’s list of targets? Or put another way;

GOT COPPER?