Copper a reliable barometer of economic health

Aksel Kibar of Invest AD explains how the metal has an uncanny ability to predict turning points in the global economy.

Copper is often referred to in the financial community as Dr Copper for its reputed PhD in economics, based on an uncanny ability to predict turning points in the global economy.

This stems from the metal’s wide applications in most sectors of the economy from homes and factories, to electronics and power generation and transmission.

Demand for copper is often a reliable leading indicator of economic health. Rising prices for the metal suggest growth, while falling prices may indicate an imminent economic slowdown.

Over the past three years copper prices have been on a downward trend, despite strength in the global equity markets. Since the beginning of 2011, copper prices have been recording lower highs, suggesting demand has lagged supply. The price has tested the US$3 per pound level four times over the past four years.

In technical analysis, the current chart pattern is called a “descending triangle”. This is a formation that usually forms during a downtrend, although occasionally they are seen at the end of an uptrend. Either way, a descending triangle is a bearish signal.

A breakdown for copper below $3 levels now will confirm the bearish chart pattern. In such an eventuality, the price could descend towards the $2-$2.5 zone within a short period of time. This is because breach of such a strong horizontal support level would be a first major sell signal for the descending triangle.

This negative outlook will only be negated if copper manages to break above $3.5 levels in the coming months.

Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD

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