[T.S.R:16512] Is JP Morgan Running A Pair Trade-Long Copper, Short Silver?

A Reuter's story reports that, " data from the London Metal Exchange showed that a single entity (JP Morgan) had increased its control over warehouse copper stocks and cash contracts to more than 90 percent, up from a 50-80 percent holding reported for the past several weeks."

--Come again?

--A single entity controlling that large a position in copper warrants? That seems pretty large. For all we know, that could be normal in the commodity futures business. It does seem pretty abnormal though, doesn't it?

--As we related last week, there's speculation that JP Morgan is on the end of a massive naked position in silver. So maybe it's a kind of pair trade. Long the entire copper market. Short the entire silver market (or more than three times the silver market, to be exact).

--We even read one reader comment that JP Morgan is being used as a weapon in the total-economic-warfare low-grade currency death match between China and America. The thinking goes that using Fed money, a trader could corner a commodity, drive its price up, and inflict a mortal wound on a major consumer of that industrial metal (China and copper, respectively).

--There could also be a perfectly normal explanation for all of it. But since we've been following copper's relentless ascent to new highs, it made sense this morning to look at which of the two Australian miners most closely tracks the red metal. If copper prices fall, which of the big two might fall with it the most?

--The chart below shows continuous copper futures prices over the last three years. That's the black line. The orange line below is Rio Tinto's US-listed American Depository Receipt (ADR) over the same time. And the red-line above is BHP Billiton's US-listed ADR. You can see that since the great reflation of 2009, BHP has left Rio in the red dust and tracked copper.

Dr. Copper and the Big Two Miners

--This is a bit surprising. Why? BHP is not just an iron ore play. And of course, iron ore is not copper. We are equating them both as industrial metals and proxies for China's growth (high fixed asset investment, which is metals intensive). BHP also has uranium, and oil, and diversified portfolio of global resource assets.

--Yet it's been tracking copper. At the very least, this tells you investors in the US view BHP as a China proxy. And Rio?

--Rio's thwarted merger with Chinalco and its thwarted iron ore partnership with BHP, not to mention the billion in debt it took on from the Alcan acquisition just before the top of the market—all of these explain its laggard status relative to copper and BHP.

--In case you were wondering if the time-scale might have been conjured to suit the conclusion we wanted to make (we didn't have a conclusion in mind, by the way), take a look at the chart below. It goes back to when the commodity boom really first got under way in late 1999 and early 2000. It shows more or less the same thing—since 20009 BHP has tracked copper and Rio has lagged them both.

A decade of metals bullishness

--Does this tell you that BHP is better run than Rio? Or does it tell you something even more useful? Namely that copper and the miners have ridden the reflation rally to new highs. But where to from here?

--The yield on the ten-year U.S. note moved up to 3.46% yesterday. It was the highest level since May. Thirty-year yields moved up too. Why does this matter if you're an Australian investor?

--If the US bond bubble is popping (and it's been inflating for 30-years) it could mean a big asset allocation migration is on. It would take investors out of fixed income and dollar denominated assets and into equities and especially tangible asset equities. The exodus out of dollar-denominated assets would be bearish for the dollar and thus bullish for the Aussie and commodities.

--All of this sounds like a compelling argument for higher highs on Aussie mining stocks. In fact the only thing that could disrupt that conclusion is a massive China crash...or some other kind of huge, unanticipated crisis that makes the U.S. dollar attractive as a "risk off" asset.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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