Copper surged over 3.5% today, the first real signs of life since our New Year forecast, bullish for the first three quarters of this year.  This is a roughly 7.7% advance in just twelve days.

As we often remind readers, Synthetic Systems plots copper largely as an proxy for the physical commodity class at large. For this reason I typically allocate only a percent or two of assets to copper itself, using silver, platinum, and mining, energy and agriculture stocks to round out the rest of the commodities sector. Gold of course is a physical commodity too, but it’s not well correlated with the rest and so SS tracks it separately.

So far this year, most of the bullish action has been in the energy complex. But copper itself may now be breaking out. It just hit the upper bound of a rising trend channel, so there is ample room for a prompt retreat, but if we waited for higher prices to verify a breakout, it would be less helpful to call attention to it. Moreover, if it does immediately beat a retreat, the opportunity for those who haven’t yet to position bullishly would only be that much more attractive.

But the more important implications are on the macro level.  Based on our FDI analysis, we’ve been tentatively optimistic on incipient disinflation, but newly surging copper, along with rebounding stocks, could throw cold water on our sunnier outlook.  The ongoing investment implications would be paradoxically more bearish, as they would have to take into account the likelihood of further increases in interest rates, yet lower bond prices, and ultimately yet lower stock prices as well.  

From a fundamental viewpoint, this introduces an intricate mix of interdependent factors, daunting to evaluate.  Fortunately though, from the Synthetic Systems viewpoint, it’s already factored in.