We believe 2 main factors are responsible for pushing aluminum, copper, zinc and nickel prices lower.
Factor #1: The Dollar
We began exploring this factor in Part One here.
The following graph proves the inverse relationship between the dollar (represented by the green line; coincidentally, also the name of the Goose Island beer only available within Chicago city limits) and copper (represented by the orange line; coincidentally, the CTA line that gets you to Midway airport) over the past 15 years.
The white arrows indicate the major tops and bottoms. The collapse in the dollar during 2002 was the main reason that commodities climbed sharply. The dollar bottom in 2008 coincided with the collapse in commodity prices, which then rose until 2011 as the dollar kept falling. Finally, the dollar bottomed in 2011 and it has been rising since then.
The red arrows show how this uptrend in the dollar since spring of 2011 is pushing commodities lower. The direction of the dollar will play a major role in the upcoming trends of metal prices. Regardless of the specific fundamentals underlying your metal, it is hard to picture its price way above current levels until we see the dollar changing direction.
What’s the second factor?
Factor #2: China
As we all know, China is the world’s largest importer of commodities, which makes China the biggest driver of global demand for commodities – including metals, of course.
The chart below shows China’s influence on the price of copper and its tight correlation. The pink line (which, coincidentally, also easily gets you to the Pilsen neighborhood) represents the FXI, which represents the performance of the largest companies in China’s equity market and therefore a good benchmark of China’s economy.
The two red arrows show how Chinese stocks turned down before copper. First, it peaked eight months before copper peaked in 2008, and again in 2011 followed by another copper peak a few months later. The resulting slowdown in China’s economy brought down demand for metals, making prices too weak.
What This Means for Metal Buyers
A global view of the market gives us a lot of valuable information about metal trends. Definitely keep an eye on the dollar and China’s economy as two headline indicators; they will play a key role in future trends of industrial metals.