Copper

It's been said that copper "has a PhD in Economics", as it's price directly responds to the economic cycle. As we are in the downward economic leg of this, it is no surprise that copper has sold off in the past months. However, I just read a well respected economic report that discussed the outlook for copper demand in the next two years, which projected a 10% increase in copper demand from China and a 2% reduction from the US. Given the abysmal state of the US economy, particularly new home construction, which is the destination of most copper, I believe these estimates are extremely optimistic. Although there are currently supply disruptions, these are short-term, and the long-term picture is much bleaker than the market is currently factoring in (the report also stated that they were on the conservative side, with a 16% gain being the consensus view). These reports assume a global de-coupling between the US and China, which simply is not true. Once the market loses the marginal demand consumed by China, an inelastic market like Copper will experience precipitous price declines.

One risk here is the continued devaluation of the US dollar due to our trade policies. Copper, being a global commodity, is a natural hedge against inflation, which could spur more buying as the dollar drops further. Therefore, it would be prudent to pair this trade with a position in either TIPS or a DXY (dollar index) short, though the DXY poses a great deal of its own risks.