Jonathan Yates: One of the nice things about having $3.2 trillion in foreign reserves — more than any other nation — and a state-controlled economy is that it allows China to continually manipulate markets for commodities such as copper (NYSEARCA:JJC), corn (NYSEARCA:CORN) and cotton (NYSEARCA:BAL).
As reported in an article in the Financial Times, “Copper soars to hit $8,000 level,” it has been a good week for the red metal, a key component of a wide range of industrial and construction activities throughout the world.
The exchange traded fund for copper, the JJC, is up almost 9% even though every major user of copper (China, Europe, India, US, Brazil) is reporting or projecting lower economic growth.
In addition, Morgan Stanley and JP Morgan (JPM both downgraded commodities such as copper this week. According to David Wilson, director of metals research for Citigroup, as quoted in the Financial Times piece by Emiko Tereazono and Javier Bias, this rally was due to “fund activity rather than any fundamental change in the overall outlook, including the macro economy.”
In other words, it is not fundamental economic demand that is fueling the rise, rather speculation.
In this, Beijing pulled off a classic “short squeeze” to drive up the price of copper. In easing its monetary policy, China caught many “in bearish” positions according to the Financial Times. Noted David Wilson, “The market has been very short, for sure.”
As China is, by far, the world’s biggest consumer of copper, the price was obviously going to rise after the announcement. Also of note is that this is the first time in three years that Beijing has reduced the reserve requirement for banks, which can now lend more to copper consumers.
China also wreaked havoc with the corn market this year. Early in the summer, articles in The Wall Street Journal and the Financial Times reported of record demand for corn from Chinese buyers. As a result, the exchange-traded fund for corn (NYSEARCA:CORN) rose from about $38 in March to over $50 by late August. Since then, it has fallen to under $40.
There should be an inverse relationship between these funds, as copper rises in price due to greater demand from growing economies while gold rises in price due to a lack of confidence in fiat currencies due to floundering economies.
But both the GLD and the JJC have risen sharply since October. For the year, however, the GLD is up double digits, while the JJC is down double digits.
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