The copper price hit a fresh 2020 high on Tuesday morning. London Metal Exchange (LME) three-month metal extended its remarkable recovery from the March lockdown lows of $4,371 to $7,331 per tonne, the highest trade since June 2018. The strength of China’s manufacturing rebound and the country’s seemingly insatiable appetite for imports of refined copper are the fundamental bedrock of copper’s 2020 turnaround. But funds are now increasingly in the driving seat with investor positioning at or near historical highs on both the CME and LME contracts. As speculative momentum keeps building, so too does the risk of a reality-check on the current exuberance. FUNDS IN THE DRIVING SEAT The change in positioning on the copper market since the depths of the COVID-19 crisis in the first quarter of 2020 has dominated the scale of the physical surplus by a factor of ten to one, according to analysts at Citi. (“Metals Weekly”, Nov. 23, 2020) Funds, in other words, have not only absorbed the physical impact of the pandemic but are now overwhelming it, becoming the primary price driver. Citi like other players has evolved its methodology for tracking speculative flows through the copper market. But the funds’ collective buy-in to copper is clear to see in the Commitments of Traders Reports (COTR). Money managers were net long of the CME copper contract to the tune of 78,865 contracts as of the close of business last Tuesday (Nov. 17), according to the latest US COTR. The positioning has oscillated gently over the last couple of weeks as the copper price marked time over the extended US election process. In broad-brush terms, funds are still holding historically high levels of long positions with outright shorts continuing to run at very subdued levels. The LME’s COTR, meanwhile, shows investment fund long positions at their highest level since the exchange started publishing the report in its current format at the start of 2018. Money managers have flipped from a collective net short of 19,000 contracts in March to a current net long of 38,000 contracts. There’s been a similar surge of long positions in the “other financial” category of the report. Alas, there is no COTR for the Shanghai Futures Exchange (ShFE) copper contract but the combination of rising prices and rising open interest suggests strongly that Chinese speculators are also being drawn into the market. Market open interest has mushroomed from 294,000 contracts at the start of November to a current 367,000 lots as the yuan price hits its two-year highs. BUYING INTO THE BULL STORY There is little doubt that however good the fundamental optics, copper has been consumed into a bigger reflation trade predicated on the proliferation of COVID-19 vaccines and the high hopes resting on incoming president Joe Biden and his promised “green” stimulus package. Whether the package survives a partisan US legislature remains to be seen. But a Biden presidency is more likely to tilt towards the sort of social and environmental policies already taking shape in Europe with its new “Green Deal”. “Covid is already ushering in a new era of policies aimed at social need instead of financial stability,” according to Goldman Sachs. (“Commodities Outlook 2021: REVing up a structural bull market”, Nov. 18, 2020) This, the bank argues, “will likely create cyclically stronger, more commodity-intensive economic growth, that should create the elusive cyclical upswing in demand.” Indeed, Goldman Sachs argues that this new era could herald a structural bull market comparable to the 2000s. Spending on green infrastructure could be as significant as the BRIC (Brazil-Russia-India-China) investment boom of that decade while the redistributive push in developed markets “is likely to lead to a large boost to consumer spending, comparable to the lending-fuelled consumption increase in the 2000s”. Also reminiscent of that decade, the banknotes, is chronic under-investment in supply to meet any structural surge in demand. Goldman’s view is that several commodities, including copper, are going to remain fundamentally tight through next year. With that sort of bull endorsement, you can understand why speculative money keeps flowing into the copper market. FUNDS VERSUS FUNDAMENTALS One characteristic of the copper market in the 2000s not mentioned by Goldman was the tension between funds and fundamentals that accompanied copper’s stellar rally from below $3,000 to almost $9,000 per tonne in 2008. There’s a similar tension building right now. “The physical reality of the metals market is a long way off from the speculative optimism,” was the warning from LME broker Kingdom Futures in a Monday client note. “That type of divergence does not last for very long so one side or the other will have to change and at the moment a huge surge in physical demand seems unlikely,” it added. That warning captures the ambivalent nature of the copper market right now as it hovers between micro fundamental and macro-financial play. There’s a proliferation of price drivers and trading relationships with other parts of the financial universe, spanning the dollar, the yuan, the Dow Jones and US Treasuries. Funds’ elevated long positioning in copper could yet be blown away by any or all of them.