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As mentioned in the Commodity Outlook, we recognize that some physical commodity markets have recently gotten a little ahead of reality. With the September copper contract seemingly recoiling away from the $2.35 level and Chinese traders suggesting that copper prices had become too expensive, it wasn’t surprising to see a bit of a correction last week. As in the stock market, the copper market seems to have fully inhaled the prospect of a global recovery in the wake of China’s PMI readings that were released on June 1st. However, as was probably seen in the June 5th US monthly unemployment report (released after this writing), the US economy is still piling up jobless numbers, and one still has to careful in assessing the near term economic situation. However, from a longer term perspective, copper looks to be one of the more prominent bull markets for the remainder of 2009. Despite the prospect of choppy economic data ahead, daily LME copper stocks have continued to decline at a pace that points to further tightening of supply and further gains in prices.
According to one well known “Stock Jock,” major auto maker Toyota is expected to continue buying up global copper assets in anticipation of a vastly expanded use of battery technology in the epic transition of the auto industry. With production of copper severely consolidated in the face of the global recession, a number of international stimulus packages focused on infrastructure projects and developing countries remaining on a moderate consumptive track, it would appear that it could take nearby copper prices well in excess of $3.00 to bring back production and in turn offset a gradual cyclical recovery in western copper consumption. With the most recent COT reports indicating that speculators were holding a moderate short position in copper futures, one could suggest that even a modest break in prices from the recent highs could put the technical condition of the market into a very bullish posture. Clearly the ebb and flow of Chinese demand for copper remains the mainstay of the bull camp in the near term, and seeing the Chinese hint that copper prices were expensive at $2.35 per pound could create a temporary fundamental value zone on the charts that may not be taken out without another wave of macroeconomic euphoria. In conclusion, we think that September copper still has a chance of seeing prices above $2.50 a pound prior to its expiration, but we also acknowledge the potential for a temporary return to the $2.10 to $2.15 level. If we were forced to pick one commodity to be long for the remainder of 2009, we would pick the September copper contract.