Speculator’s Corner: Copper Set To Soar?

| November 5, 2012 | 0 Comments

When the Fed announced QE3 back on September 13th, it was widely expected to be a boon for hard asset prices.  And front running speculators loaded up on long futures contracts on everything from copper to oil ahead of the Fed’s announcement.

The pre-QE3 speculation sent hard asset prices soaring in the weeks leading up to the Fed’s announcement.

But a funny thing happened…  The rally in hard asset prices after QE3 never materialized.  And speculators quickly unwound their speculative positions. 

As you can see in the chart below, spot copper prices quickly dropped back to where they were before speculators began bidding up prices in anticipation of a Fed fueled rally.

Copper prices are now at their lowest levels in two months. The sharp selloff sent the spot price for copper plunging from $3.84 to $3.47. 

Here’s where it gets interesting…

This week could mark the turning point for copper.

Speculators headed to the sidelines after QE3 failed to spark a rally in copper prices.  And they’ve remained their ahead of the US Presidential election and China’s leadership transition.

As you know, US elections are on Tuesday and China will begin their leadership transition on Thursday.

And no matter who wins the US presidency, it should be bullish for copper.  It’s simply the uncertainty that these events create that’s holding back new speculation in copper prices.   Once we’ve put these events in our rearview mirror, speculators should come back into the market.

Don’t forget, China is the largest consumer of copper in the world.  And the new Chinese leaders’ top priority will be reviving their slowing economy.  That means more infrastructure projects and greater demand for copper.

What’s more, a longer term look at the chart of copper indicates a big move is brewing.

For the better part of two years, copper has been consolidating a symmetrical triangle… with a few failed breakouts to the upside. 

Copper Chart

This chart is neutral.  A breakout to the upside would indicate the beginning of a new bullish uptrend.  While a breakout to the downside would indicate the beginning of a new bearish downtrend.

What’s more, since this pattern has dominated copper for nearly two years, the ensuing breakout will likely lead to a big move in copper prices.

Here’s the thing…

At this point, the charts, headlines, and fundamentals are all aligning for copper.  And it will likely lead to a big move in copper prices over the next few months.

One way to speculate on the coming move in copper is by buying options on the world’s largest publicly traded copper producer… Freeport-McMoRan Copper & Gold (FCX).

FCX has recoverable proven and probable reserves of about 120 billion pounds of copper.  And they produce about 10% of the total global supply of refined copper every year.

Right now you can buy the January 2013 $45 calls for around $0.55.  If copper breaks out and runs over the next few months, these cheap call options could more than triple in value.

Good Investing,

Corey Williams

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Category: Speculator's Corner

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.