Konstantin Inozemtsev
A mystery investor has cornered the copper market in London amassing a dominant position in the metal stored in London Metal Exchange warehouses around the world. Figures from the LME suggest a single investor is holding warrants for between 50 and 80 per cent of copper stocks and on Tuesday the copper price skipped $200 per tonne higher in a market already excited by inflation worries, dollar worries and news that President Obama was preserving some tax breaks for rich people.
It's not entirely unheard of for a single investor to get his hands on such a large pile of warrants for physical copper stocks but it is causing jitters in a feverish commodity market. Oil is hovering around $90 per barrel, gold is at an all-time high and silver has been added to the pack of metals deemed to be good homes for nervous money. The silver price jumped above $30 per troy ounce on Monday and rose again on Tuesday as investors searched for new bolt holes from what they see as the corrupt world of fiat money. The precious metals, such as gold, silver and platinum have always been seen as safe havens but in these uncertain times there isn't enough gold to calm everyone's money neurosis and now the funds have hit upon copper.
Several banks and funds, including JP Morgan and BlackRock Asset Manangement have signalled that they plan to create exchange-traded products in physical copper. Like the gold exchange-traded products, investors will be able to buy an amount of real metal, held on their behalf in warehouses, rather than copper futures and it is the need to acquire the physical product that has roused suspicion that it is a financial institution hoarding physical metal in preparation for the launch of its ETP.
The identity of the hoarder is less important than the signs that investors are becoming obsessed with the ownership of physical assets. Copper is not normally hoarded like gold, which is a largely useless metal except for vanity. Industrial uses of gold are almost irrelevant in the supply/demand equation but copper is vital.
Copper conducts power and water to the world in wire and pipes. Demand for copper is strong; China's copper appetite expanded by 26 per cent last year and is expected to gain 13 per cent this year, according to RBS. There are no big new mine supplies expected to come on stream soon and no buffer stocks. The effect of the exchange-trade funds could be to isolate stocks of physical copper from the underlying market, says Daniel Major, an RBS metals analyst.
That is a worry. If panicky financial investors begin to hoard industrial commodities as an inflation hedge we begin to move into dangerous territory. Prices will rise, not because of bottlenecks in supply but because a base metal has suddenly acquired allure as a store of monetary value.
Would we accept an exchange-traded product in a food commodity, such as wheat or rice? Even if storage of food was not a problem, public policy might intervene to ensure stocks were available and, it could be argued, the same should apply for useful metals. Farmers respond quickly to crop shortages and price spikes with additional planting for the next season.
However, a new copper mine or offshore oil project might take a decade of plannning and investment. It is hardly surprising that China's state industries are frantically buying physical assets - mines and oil wells - in Africa, Canada and Latin America. You cannot blame them when your pension fund is hoarding copper.
Follow Economy Lab on twitter
Carl Mortished