Copper is considered a barometer for world economic activity. The rise in copper prices hints that the economic activity in the world is increasing while the fall in prices hints that the activity is decreasing. While we are not here to discuss this simple theory, we are however here to discuss on the recent movement of copper prices. We are here to try to demystify the volatility in copper prices.

• So what has happened in the world that created the volatility that we see in copper?
• Wasn’t the world recovering from the economic turmoil and wasn’t this suppose to push copper prices to new highs??
• What went wrong??

If any of these questions make you lose your sleep, then, my dear readers, please read on.

As can be seen from the chart above, copper seems like it dropped off a cliff during late august, last year. How could this have been possible when the whole world was recovering? One needs to think China at this moment. In recent years, China has emerged as a major player in world economy and has even managed to become the second biggest economy in the world. China again, is one of the largest importer of copper. Due to this reason, what happens in China doesn’t stay in China anymore, it affects the world commodity prices.

Inflation fears, coupled with a slowdown in the Chinese economy pressured copper prices last August. Five interest rate increases, limits on home purchases and lending curbs were some of the measures that the government of China took in order control inflation. However, all these measures were not enough to reduce inflation which was at that time, hovering around 6.5 percent, a 3 year high. The measures were however slowing the Chinese economy which for many traders meant, that the economic activity and hence, copper imports would fall in the coming months. As a result, copper prices made a free fall which lasted till the first week of October. However, copper prices then did a u-turn and started increasing. The prospect of the Greek debt ordeal FINALLY coming to an end as well as positive economic data from the US saw many copper traders return to the market with smiling faces.

But all that seems well is not well, so it seems !

With the world media and the American media in general talking about how the recession has ended and how the world is actually recovering, one might seem to think that is the case. However, the prices in copper depict otherwise. After a slight rally that lasted just 5 months, we can see that copper prices started a slow and painful rally to the south.

So what has transpired this downward trend in copper prices??

Think again China! Think again World recovery. These two terms have come back to yet again haunt copper prices as it has been revealed that there is now more copper in China than any other time in history and the economic growth that was at an envious double digits is sharply slowing. At the same time, the recovery that was supposedly underway in the world seems to have hit a snag and all is not well on both sides of the Atlantic. The disappointing economic data coming out of the US as well as Europe all suggest that the recovery that was so well and truly underway might have stalled.

So one is left to ponder as to what could be the step in the right direction? Dear readers, please proceed with caution. There are bumps along the way and the best way forward is through careful study and appropriate trading discipline.

Have a great weekend! :)