China’s Counter-Deflation Bet Pays Off Big

Oh to have the resources of China.

The Financial Times reports in “China sits on up to $1.5bn in copper profits” that China has cleaned up in betting against the deflationary fears that gripped much of the planet in 2008-2009:

“Beijing’s bet that a ‘super-cycle’ in metals markets would keep copper prices high, despite the financial crisis, has paid off, according to dealers’ calculations. The substantial paper profits come after China’s State Reserves Bureau, the official body in charge of the country’s strategic commodities reserves, mopped up copper surpluses last year when the crisis was at its worst and prices had tumbled.”

Copper is now within 7% of its all-time high set in July, 2008. Traditionally, this signal would indicate that copper traders are expecting a robust economic recovery somewhere around the corner – if one is not already underway – assuming prices do not experience a sudden reversal. However, China’s insatiable demand for copper has thrown this traditional economic signal for a loop. It may mean nothing in the United States except that the odds for some kind of stagflation have materially increased. If the Fed sprinkles more paper over the U.S. economy, copper prices could run even further. Profit-taking may present the main resistance to further price as China looks to cash in on its hoarde of copper. This prospect sits on the minds of many:

“Traders and analysts believe China is preparing to cash in on its paper gains soon. Joshua Crumb, metals analyst at Goldman Sachs, said China’s SRB was likely to ‘prudently sell or lend metal’ to keep a ‘lid on price spikes over the next few quarters’.”

For a more detailed discussion and debate about the near-term prospects for copper see “Copper rallies on strong emerging-market demand – Commentary: Copper prices as a gauge of economic trends

Copper has experienced a remarkable recovery from the depths of recession and fears of deflation
Copper has experienced a remarkable recovery from the depths of recession and fears of deflation

Be careful out there!

Full disclosure: no positions

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