The global economy is in trouble. At least that is what recent copper price movements tell us, and it could get much worse.
Demand for copper is often a reliable leading indicator of economic health – rising prices suggest growth, while declining prices indicate imminent slowdown.
In October, this column flagged the possibility that copper, which was trading at about US$3.05 per pound, was in danger of entering a sharp decline. That is exactly what happened, when the metal broke down strong support levels in late November to slide to about the current $2.5 to $2.6. Worryingly, there may be more to go.
In the past three years the copper price has been in a downtrend, despite strength in the global equity markets, testing the $3 per pound level four times in four years.
Breakouts from such low-volatility periods are usually followed by strong trend periods, and that is exactly what happened in November. We have already seen similar price action by other industrial metals, such as zinc, lead, aluminium and nickel, which are either close to or already 50 per cent lower than their 2008 historical high levels.
In technical analysis, the current chart pattern for copper 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.
The price target calculated from the current descending triangle for copper suggests a $2 to 2.2 per pound level in the coming months.
This does not bode well for the global economy.
Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD
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