Copper shines in reflation trade

13 February 2017

Copper started showing signs of life post Trumps surprise election victory when the reflation trade became the big story. Investors assumed that Trumps policies of fiscal stimulus and loose monetary policy would drive up inflation and coupled with increased infrastructure spending, investing in copper seemed a no brainer. We had covered this in an earlier graph on 24th November, 2016, when LME Copper was at $5,600 per ton, predicting that Copper could climb $6000, in the near term, a level which it is close to achieving today.

The story for copper remains intact currently given that Chinese demand is picking up and niggling supply risks (Strikes in northern Chile) still remain, which would keep prices higher at least for a little while longer. However the reflation trade, at least in the US, seems to have a hit a wall, with investors uncertain about policy and administration under Mr. Trump.

We expect the prices to hit a consolidation phase or even tend slightly lower, to digest the rise in the last two months but over the longer term, we remain firmly bullish on Copper. With oil prices firmly above $50 and the momentum in demand both from the US and China, inflation is set to tend higher across the globe. Copper seems to be the commodity of choice as a hedge against inflation rather than gold, since it naturally tends to rise and even do better than Gold, the traditional hedge against inflation.

Secondly, Trump is likely to put together a strong plan to boost infrastructure spending in the US, driven primarily by a fiscal stimulus, in the second half of the year which would strongly support Copper prices. It is likely that Copper prices would continue to move up in anticipation of the same, barring the possibility that Trumps presidency itself becomes uncertain, which looks unlikely given the support that he currently has.

Source – Moneycontrol