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Metals rebound with conviction, will copper move to new highs?

24/01/06

Last week saw two equity induced sell-offs, both of which dragged metal prices lower only to find sufficient underlying buying waiting to carry prices higher again, although volumes were not thought to be that large. This buy-the-dips mentality has proved remarkably reliable and just goes to show how strong underlying bullish sentiment is. With high energy prices threatening metal production and good investment interest supporting the pricing mechanism, these high prices look set continue for as long as the funds remain bullish. So far consumers may be shocked by the level of the price rises, but as metals generally are a vital component of the finished product, what option do they have other than to keep buying. However there are risks; high energy prices, consumer debt and concerns over the global financial imbalances, could unsettle the demand side of the equation, especially if the dollar starts to weaken which it has started to do. The dollar index has fallen from 92.60 in November to below 88, triggering a head and shoulder pattern in the process - no wonder gold is managing to push higher despite looking overbought. However if this dollar weakness leads to economic weakness, then I’d prefer to be holding gold as a hedge against dollar weakness rather than the high priced industrial metals.

US leading indicators were weaker than expected, the result of a slowdown in the manufacturing orders, the housing market and higher oil price, although countering this disappointment was the revision to November’s figure which changed to +0.9% from the initial 0.5% rise. Today’s data includes ICSC-UBS store sales, the Redbook, State Street Investor confidence index and various treasury auctions. Overall with copper once again above $4600 the market will be keen to see whether there is follow through buying to carry prices to new highs, or will prices drift back to retest support at $4530.

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