Dr. Copper is Sick and Here's Why It's a Problem

On October 17, 1012, the Financial Times ran an article titled, "Copper prices to fall but not collapse."

Here's an excerpt, try not to laugh:

"Most traders expect average (copper) prices next year (referring to 2013) to be slightly lower as the uncertain growth outlook combines with a rise in mine output. Traders predicted average prices of $7,000-$8,000 a tonne, but said copper would continue to outperform other metals. A senior copper trader added: 'I think people are going to be surprised on the upside.'"

What's happened since then? LME Copper (cash buyer) was trading just shy of $8,200 when the FT story ran. Now, copper is roughly 16% lower and at 18-month lows. That's hardly anything close to the bullish expectations of analysts or mining experts.

Since a picture is worth a thousand words, our accompanying chart (see below) gives a good visual as to the type of damage that's occurred in the copper market. Why does it matter? (Podcast: Gold Market Crashes and Other Reasons to Be Optimistic)

Although the attention of the great commodities (NYSEARCA:GCC) selloff of 2013 has been directed at declining gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) prices, copper is arguably a more important measure of global economic health.

As an industrial metal, it's used in everything from houses and healthcare devices to tech gadgets. High copper prices are reflective of high demand and a robust economy, whereas rapidly falling copper prices, as we've seen over the past six months, raise serious red flags. Although it may sound cheesy, Dr. Copper is the only metal with a Ph.D.

Rightly so, copper prices are widely viewed as a bellwether for economic activity.

Exchange-traded products (ETPs) linked to copper include the iPath Pure Beta Copper ETN (NYSEARCA:CUPM). The note was launched in April 2011 and uses copper futures contracts with varying expiration dates to gain its market exposure. CUPM has declined -11.18% YTD and is down -12.66% over the past year. 

The First Trust ISE Global Copper ETF (NYSEARCA:CU) contains exposure to 27 stocks involved in copper mining. Among the top three holdings are Xstrata, Southern Copper Corp. and Rio Tinto. Currently, CU is in a bear market and has collapsed -26.14% since the beginning of the year.

One final copper related ETP is the iPath DJ-UBS Industrial Metals ETN (NYSEARCA:HEVY). The note tracks five futures contracts on industrial metals, four of which (aluminum, nickel, copper and zinc) are traded on the London Metal Exchange and the other of which (copper) is traded on the COMEX division of the New York Mercantile Exchange.

The May 2013 issue of the ETF Profit Strategy Newsletter examines the uncanny ability of copper to signal what's ahead for stocks. In fact, there is one rare chart formation that strongly suggests the onset of a 2008-like decline, a development that's certainly supported by the number of indicators spanning a variety of markets.