A curious case of Dr. Copper
A long-term perspective on Dr. Copper
Copper is one of the most important base metals because of its wide usage in many sectors of the economy. The demand for copper has been a reliable leading indicator of global economic health. The year-over-year (YoY) change in copper price correlates well with that of the ISM Manufacturing PMI, which is widely considered a key indicator of the state of the US economy (Figure 1). The correlation of the YoY change between copper price and the S&P 500 index suggests this base metal is also a reliable barometer of the economic cycles (Figure 2). Hence the market lingo “Dr. Copper.”
Figure 1 Copper (% YoY) vs. ISM Manufacturing Index (% YoY)
Figure 2 Copper (% YoY) vs. S&P 500 (% YoY)
Since 2014, the copper price has moved in a well-defined uptrend channel (log scale), despite a few “booms and busts” during the economic cycles of 2004-2008, 2009-2016, and 2017-2020. Subsequently, it peaked in March 2022, spurring fears that the commodity could be running “too hot.” However, looking into the Fibonacci channel in Figure 3 gives us a very different long-term perspective.
The copper price bottomed in March 2020 as COVID-19 rattled the global economy and financial market. Since then, it has rebounded to just above the 61.8% Fibonacci channel and now consolidating near the 50%. In two of the three previous cycles since 2004 (except for the truncated one between 2017 and 2020), the copper price rallied all the way to the top of the channel. Such magnitude could usually be found for Dr. Copper in a complete cycle. If so, after consolidation and quite possibly some more retracement, the copper price could eventually reach US$7 per pound in the next few years.
