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XMFSinchiruna (27.98)

JPMorgan Tinkers with Another Metal Market

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37

December 08, 2010 – Comments (11) | RELATED TICKERS: JPM , SLV , COPX

You have to hand it to JPMorgan. They clearly live by the motto: "go big or go home".

This time, it's copper:

http://www.fool.com/investing/general/2010/12/07/the-worlds-copper-cauldron-boils-over.aspx

The mystery trader … revealed
Even as the bank fields investor lawsuits and looming regulatory scrutiny over alleged manipulation of the silver market, JPMorgan Chase (NYSE: JPM) is back in the limelight, this time involving copper.

The London Metal Exchange (LME) raised eyebrows recently when data revealed a single unidentified trader had amassed a copper position equivalent to at least 50% of the exchange's available supply. The mystery trader's $1.5 billion move to corner a significant chunk of above-ground global supply turned up the heat on a copper cauldron that was already steeping with a looming global supply deficit.

Over the weekend, the plot thickened as London newspaper The Daily Telegraph cited a confidential source identifying JP Morgan Chase as the mystery trader behind this cuprous coup. Now, it just so happens that JPMorgan Chase is preparing to launch a new, "physically backed" copper ETF along the lines of those wildly popular precious-metals vehicles like the SPDR Gold Trust (NYSE: GLD). As one LME trader put it: "The story is that they're positioning themselves in front of the ETF."

From the infamous Hunt Brothers debacle of the late 1970s, to the widely observed oddities in silver during the price collapse of 2008, the obvious problem inherent in any one entity controlling a dominant stake in any commodity market is that it renders that market susceptible to price manipulation. Even though I am invested in copper, and I stand to gain from further price increases that may be triggered by dwindling physical stockpiles, I consider this dominant market position a patently unhealthy development for financial markets.

.....

The bullish double whammy
In constructing my own investment theses within the materials sector, my focus is always honed first and foremost upon this long-term secular trend that has clearly dominated these markets over the course of the past decade. Incorporating the broader rise of emerging (and in some cases fully emerged) markets, persistent demand for metals-heavy gadgets like smartphones, the nascent revolution toward greener energy solutions, and of course the dominant underlying trend of deteriorating purchasing power in the world's major currencies, I continue to invest with confidence in base metals like copper.

When a financial giant moves into a specific commodity with a position of this magnitude -- however unwelcome such potential market-tinkering may be -- I perceive the development as further insurance behind the continuity of the trend in play. I believe copper is going higher, and I encourage Fools to participate. Whether one prefers to target a single quality small-cap play like Taseko Mines (AMEX: TGB), or cast a wider net with the Global X Copper Miners ETF (NYSE: COPX), I see a red-hot future for red-metal investors.

 

 

11 Comments – Post Your Own

#1) On December 08, 2010 at 10:35 AM, ClockworkLynx (23.73) wrote:

Thanks, as always, for your insightful and well written articles!

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#2) On December 08, 2010 at 11:52 AM, mtf00l (43.78) wrote:

I just read a blog from whereaminow regarding metal manipulation!!!

Maybe he'll swing by and comment?!

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#3) On December 08, 2010 at 3:26 PM, Valyooo (99.65) wrote:

How is this bullish? There is so much money pouring into copper for reasons other than industrial...once people stop loving commodities as an investment won't the actual demand be far lower?

Also, why would jpm want to short the hell out of silver? Not denying that it happened I just honestly can't think of a reason and I've asked people and got no response

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#4) On December 08, 2010 at 5:24 PM, rd80 (98.77) wrote:

+1 rec and a couple comments.

Building a stockpile of copper to back the creation of a new ETF seems perfectly reasonable. 

Just because JPM was the buyer doesn't mean all the metal was for its own account.

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#5) On December 09, 2010 at 9:21 AM, XMFSinchiruna (27.98) wrote:

rd80

Building a stockpile of copper equivalent to 50% of the supply at the world's largest warehouse strikes me as something distinct from a legitimate head-start on a physical ETF. This runs counter to the interests of the future copper ETF buyer by raising the copper price before the units start trading. It's great for JPM because they get to sell their supply to the ETF at greatly elevated prices from the purchase price.

Again ... I am continually amazed at how eager investors are to forgive the banks of their every action ... even when those actions are clearly hostile to the American consumer / investor. JPM is boosting the increase in copper prices, which will show up in range of prices for consumer electronics, new homes (not that many are being built), autos, alternative energy products, etc., etc. 

We may never find out whether this hoarding was done for the bank's own account or not, but I would wager a pretty (copper) penny that this purely an internal play.

Valyooo

There are fortunes to be made in controlling a market in either direction. Don't think of it as one static short position that never changed ... although JPM and HSBC were apparently net short for much of 2008-2009, those positions saw huge and volatile swings in balances between long and short positions. When you control enough to essentially dictate the direction of daily trade at will, you can press your long positions before letting a metal gap up, and then press a short position when you're ready to strike it down. Those account tweaks can come daily, while the public only gets a weekly glimpse at the COT (commitment of traders), and those do not indicate the precise actions of any one entity.

I don't claim to know the entirety of their motives for what these banks do in the metals markets. I suspect their may be some quid pro quo in this with respect to the Fed, but that is merely speculation (the Fed is the only entity that truly ends up answering the age-old question: "qui bene?").

In short, I think it's possible for the banks to have amassed fortunes for themselves playing the daily swings even while maintaining a relative strangle-hold on the broader upward trend. It is, furthermore, practically unfathomable how much money they could have made by playing part in the price crash of 2008-2009.

Does that help answer some of your questions? I appreciate your desire to wrap your head around the "why"... it's an important question indeed. I hope one day we'll know the answer as fact rather than as speculation by me or anyone else. Until then, speculation is all we have. But the real facts of the case remain unaffected by these questions.

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#6) On December 09, 2010 at 11:57 AM, rd80 (98.77) wrote:

Hi Sinchi,

I was looking at it from the aspect of how much copper might be needed to kick off a physically backed etf. 

I assume JPM would have done some market research and has a handle on the range of initial demand for the etf.  Compared to GLD ($50+ billion) and SLV ($7 billion), which are (supposed to be) backed by the physical commoditity, $1.5 billion doesn't seem grossly out of whack.

'course that begs the question of whether there's enough copper in the market to support a physically backed etf in the first place.

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#7) On December 09, 2010 at 12:21 PM, silverminer (31.54) wrote:

rd80

"'course that begs the question of whether there's enough copper in the market to support a physically backed etf in the first place."

Bingo ... there clearly is not sufficient physical supply, which is the underlying thrust behind my bullish thesis in the above article.

I'm buying copper.

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#8) On December 09, 2010 at 7:02 PM, silverincite (65.90) wrote:

I am long copper and thought you might find Minera Andes (TSE:MAI) an interesting play on copper, but also on silver and gold.

They have 49% of the San Jose mine located just north of the Andean project that Goldcorp recently bought and they own 100% of a couple of properties right beside the Andean project. On top of that, they have a copper property in the north part of Argentina with a current resource of 12 billion pounds of copper.

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#9) On December 09, 2010 at 7:21 PM, NOTvuffett (< 20) wrote:

Sinch,

It seems that more tightening moves will come out of China soon.  Wouldn't that cause a dip in the copper prices despite JPM's recent actions?

 

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#10) On December 12, 2010 at 10:20 PM, skypilot2005 (< 20) wrote:

Sinchi,

I've done a little investigating this weekend.  I've discovered Thompson Creek, according to their website, has substantial copper assets projected to go into production in 2013.

From their Website:

"Mt. Milligan project will produce an average annual production of  approximately 81 million pounds of copper, 194,500 pounds of  gold for the 22 year mine life.  Production starts in 2013."

http://www.thompsoncreekmetals.com/i/pdf/FactSheet.pdf

I have a small portion of my portfolio in T. C. at an average cost of  $10.63.  I am going to "pull the trigger" and buy some more, tomorrow.

Just thought I'd let you know and submit they may be a long - term copper "play".

I have to rebalance my portfolio constantly due primarily from research  I have read from you, my resulting stock purchases and subsequent increases in the value of the miner's portion of my portfolio.  Most notably, SLW, Great Panther and TGB.   :)

I have a total of 20 miner's stocks in that portion of my portfolio.  

Hopefully, this is some information I can impart to partially return the favor.

 Thanks again,

 

Skypilot

 

 

 

 

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#11) On December 13, 2010 at 9:38 AM, XMFSinchiruna (27.98) wrote:

skypilot2005

I'm delighted to learn that another fellow Fool has done well by leading sector picks like SLW and GPRLF. As you might imagine, it's precisely that feedback of learning how I've helped families to navigate this tricky investment landscape that keeps me excited about conducting my research on an ongoing basis.

I also appreciate the sentiment behind your above pitch for Thompson Creek, and I hope that it will serve to remind fellow Fools of the incredible potential awaiting in the development of Mt. Milligan. I owned Terrane Metals (which TC purchased this year to acquire Mt. Milligan) from years back, and enjoyed a nice 200% ride in those shares through their take-out by TC. When TC shares plunged on the takeover news, I performed my DD on the remained of the company, decided Iiked the cash position and the company's low-cost moly production profile, and moved into TC shares at $9.20.

This is bound to be one of my longest-term holdings. I keep waiting for another price pullback to increase my stake further, but lately the stock has shown great strength (especialy since the rare-earths ETF launched with TC among its holdings). If you like a trio of moly, copper, and gold, (as I do) then TC is a sweet concoction.

Thanks for providing the opportunity to remind Fools of that solid long-term play. Please find my two previous articles on the company / asset below.

Sinchi

http://www.fool.com/investing/international/2010/03/25/your-treasure-map-to-golds-mother-lodes.aspx

http://www.fool.com/investing/general/2010/09/22/smooth-terrane-for-thompson-creek.aspx

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