Although copper was already rising on last quarter’s stealth Chinese stimulus, Trump’s election win sent the industrial metal soaring. Hopes about a trillion dollar infrastructure package sent speculators scrambling to buy copper ahead of the anticipated build out.
Copper became one of the preferred ways to play the new “Trumponian growth plan.”
It is no surprise that in our limited-alpha-chase-every-theme environment, net speculative positions have gone through the roof.
Although all these speculators might be convinced they know how Trump’s infrastructure plan will roll out during the next four years, I think they have gotten way ahead of themselves. I don’t think even Trump knows the plan yet. It’s one thing to talk about infrastructure spending, but it’s quite another to follow through with it. Here in Canada Trudeau is learning first hand the difficulties with actually spending the money. Even if everything lines up perfectly for Trump, we are still months, and most likely years from copper being purchased for Trump’s stimulus.
Somehow I doubt all these hedge fund speculators have the patience to wait that long. And that’s assuming everything goes perfectly. What if Trump finds opposition to infrastructure spending? Or what if he changes his mind? It’s far from a done deal.
I have learned the hard way about being on the same side of crowded trades. Too often the speculators all bail at the same time in a sickening swoosh. It’s just the way markets trade today. No sense complaining about it. As traders we need to adapt or die.
I am adapting, and although it is a little scary, I am taking a small short position in copper. I would rather be on the other side of their trade, ready to bid down lower when the flush comes.
For those knife catchers that somehow still have some fingers left, I have an even more aggressive trade for you. Since the election, gold has been sold aggressively. The backup in interest rates (with the accompanying US dollar rally) is the main reason for this decline, but it doesn’t hurt that everyone is now convinced economic growth is right around the corner.
Although I believe inflation will outperform expectations, I am not nearly as optimistic about real growth. I think we will have nominal growth, but real growth will be difficult to create with the wave of our new President’s hand.
With gold’s collapse and copper’s monster rally, the ratio between the metals has exploded upwards.
Not content to merely fade the copper rise, I am going to double up on my stupidity and also fade the gold decline. I will trade it small with the understanding this ratio might well move back up to 0.215, but I am initiating a short copper/long gold trade in here. I know all the hedgies are going to exact opposite way, but that just makes it more appealing…
Thanks for reading,