COPPER >>>

Inventories at the London Metal Exchange have actually risen quite steadily this year, hitting 473,275 tonnes as of opening yesterday, even as prices have also been rising. The last time copper was at $3.14 was back in September 2008, when the month-end LME copper inventory stood at 198,600 tonnes—or less than half of where it stands today. And the last time inventories hit the level we see currently, copper's price was under $2.

Now, price and inventory are not always negatively correlated, but they are at least theoretically related—low inventories generally correspond to high prices, and vice versa. Right now, that relationship seems completely broken.

The Dollar Or China: Which Matters More To Copper?

Given copper's 130 percent performance this year, there has been a lot of money flowing into the metal. In fact, some in the market are hinting that copper's price has decoupled from its fundamentals, and it's now trading more like a precious metal, fluctuating on the dollar.

One analyst, Dan Smith with Standard Chartered Plc in London, told Bloomberg that he predicted copper could drop to $6.00 a metric ton in the first quarter, saying, "We think the dollar will generally strengthen heading into next year, and that will partly reverse some of the strong investor inflows."

Another theory links Chinese lending patterns to the copper price. (It always comes down to China, doesn't it?) A recent article on Commodity Online notes that as new loans are made, Chinese consumers use the money to buy copper, which in turn pushes up the price. After the loans are used, investors take their profits, and copper falls. Since new lending tends to be concentrated during the first quarter of the year, the argument is that the first half of 2010 may continue to be favorable for copper, although this is, in some ways, artificial.

Playing The Copper Market

So will copper be tight, or will there be a surplus? Will investors continue to pour money into copper, or retreat to other metals and investments, leaving actual copper consumers holding the bag? I guess it all comes down to whether you feel the economic recovery has come and gone or still lies ahead.

Either way, there's still plenty of opportunity to play copper, even if the metal has already risen 130 percent this year.

If you're a regular reader, you probably already know the three main plays:

• Stocks (e.g., BHP Billiton - which may or may not be a good idea at the moment, given its reduced output situation)
• Copper futures
• Exchange-traded products

On that last point, a number of metal-sector exchange traded products currently hold significant weights in copper, including the iPath Dow Jones-UBS Industrial Metals Subindex Total Return ETN (NYSE Arca: JJM) and the PowerShares DB Base Metals ETF (NYSE Arca: DBB). JJM has 45 percent of its holdings in copper, while DBB holds 32 percent of assets in the metal.

Of course, there's always the pure play: the Dow Jones-UBS Copper Subindex Total Return ETN (NYSE Arca: JJC), which simply tracks the front-month futures contract; JJC trades extremely well for an ETN.

One final thought—since it's flu season, and people are washing their hands and using hand sanitizer obsessively, you might be interested in a possible future source for increased copper demand: copper fittings for door handles and faucets. A study was just published that showed that in hospital settings, copper fittings reduced the transmission of so-called superbugs by up to 95 percent.

The study sponsor? The copper industry.

From .. HardAssetsInvestor.com