Copper weakness drags silver lower as gold maintains stability

Copper futures in London and New York trade below key support for the first time in four months, thereby supporting fresh selling by momentum-based funds forcing a reduction from long-term focused bulls. The weakness has spread to silver, already trading softer in line with gold after Wednesday’s US inflation report raised concerns about the FOMC’ willingness to deliver the +75 basis points rate cuts that are currently priced in for this year. 

During the past month we have seen broad losses across energy and industrial metals in response to continued concerns about the global economic outlook and a recovery in China that has proven to be less commodity intensive than previous government supported growth sprints. Instead, the acceleration in Chinese growth, potentially reaching 6% this year, has been led by consumer demand and the service sector, rather than infrastructure spending and construction. 

We view the current setback in copper as temporary as the green transformation theme in the coming years will continue to provide a strong tailwind for copper, the best electrical-conducting metal towards the green transformation which includes batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Not least considering how producers face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds. 

A development that will likely see the market turn into and remain in a deficit in the coming years, thereby underpinning prices in order to support mining companies' profitability and their appetite for embarking on new multi-billion multi-year projects in order to add supply. In the short term, however, the market is challenged by demand softness and by short sellers looking for lower prices. According to the latest Commitment of Traders report covering the week to May 5, the HG copper net-short held by hedge funds jumped 49% to 15.7k lots, a nine-month high. 

In a downtrend since the January peak at $4.3550/lb – on China re-opening optimism – the front month HG futures contract now trades back below support-turned-resistance at $3.80/lb, and below the 200-day moving average and the 50% retracement of the September to January rally. The next key level of support will be $3.6680/lb, the 61.8% retracement.