More Copper Weirdness

Checking into inventory levels of copper adds to my questions on the longer term direction of this industrial metal:

Now let's review what the price has done over the past 5 years:

It appears that inventory at the London Metal Exchange is about 4 times as large today as it was in 2006, yet the price of spot copper has doubled.

Consider this chart showing the start of the Fed's Quantitative Easing program, let's call it QE1:

QE1 begins in October 2008 and the price of copper begins to rise dramatically in December 2008 and the amount of copper inventory also rises in the October to December 2008 time-frame.

Has Quantitative Easing had any impact on commodity prices?

Not according to Ben Bernanke:

Chairman Ben S. Bernanke's speech "The Economic Outlook and Macroeconomic Policy" presented at the National Press Club, Washington, D.C. February 3, 2011.

"On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.8 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy."

Read more at Suite101: Quantitative Easing (QE) Great Success Says Ben Bernanke

According to Benny, it is the fast growing economies that are responsible for the run up in prices. Oh, and then there are the supply constraints that are increasing the inventory of copper in warehouses around the world. I am sure it has nothing to do with hot money flows from hedge funds driving up the price due to speculation on China's never ending growth treadmill.

So there it is everyone, copper prices are driven by pure demand fundamentals, not by Quantitative Easing or any other kind of easing.

Never fear, Inspector Gadget Ben Bernanke is always on duty.


  1. Great work PW, great work indeed.


  2. Hey, come now, who tipped you off on those CME LME inventories...the steveo did.

  3. Thanks for the excellent tip off Steveo!


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