More tariff-related chaos, anyone?
Copper just made headlines (picture courtesy of Yahoo!Finance):
The recent Bloomberg article presenting Citigroup's bullish copper outlook provides an excellent opportunity to revisit my consistent analysis framework and why I think there's a good reason to question their new prediction.
The Temporary Tariff Effect
Citigroup has reversed its previous bearish stance ($8,500/ton prediction) to now forecast copper reaching $10,000/ton within three months. Their reasoning? "Ex-US physical market tightening is likely to persist through to May/June, temporarily offsetting price headwinds from broader US tariff announcements."
However, this analysis overlooks a key pattern I've repeatedly identified in my previous analyses: tariff announcements create predictable, temporary, and ultimately misleading market reactions that are quickly reversed.
History Repeats Itself
In my March 5th analysis, I detailed extensively how tariff announcements historically affect copper:
- Initial Emotional Bounce : Markets react with a knee-jerk rally
- False Breakout Pattern : These rallies fail to sustain and often mark local tops
- Subsequent Reversal : The primary trend reasserts itself, typically downward
When tariffs were previously announced, I explicitly wrote that "copper rallied very temporarily, and I wrote that it was likely the top at that time (and it was)." This pattern has proven reliable across multiple tariff cycles.
The Pre-Implementation Surge
What Citigroup interprets as genuine market tightness appears instead to be the predictable rush to import copper ahead of potential tariffs. This creates an artificial demand spike that inevitably collapses once tariffs are implemented - something Citigroup actually acknowledges in their own analysis when they admit they "still expect a pullback once tariff-induced US copper import demand collapses."
Dollar Strength: The Missing Factor
My detailed historical analysis showed that despite initial reactions, tariffs typically strengthen the USD after an emotional selloff period:
- During the 2018-2020 trade war, the Dollar Index rose approximately 9%
- Steel and aluminum tariffs in 2018 boosted the dollar by 2-3% a month after the announcement
This USD strength historically creates significant headwinds for copper and other dollar-denominated commodities - a factor that is seemingly absent from Citigroup's analysis.
Technical Signals Remain Bearish
My technical analysis has consistently shown copper invalidating moves above key Fibonacci retracement levels (if not immediately, then eventually – invalidation of the move above the previous intraday highs is an early indication). These technical failures, combined with the now-established pattern of diminishing market reactions to each successive tariff announcement ("tariff fatigue"), suggest a different outcome than Citigroup's forecast.
Besides, let’s not miss the forest while looking at the trees. Here’s copper’s long-term chart.
(You may want to click on the chart above to expand it.)
Can you see how copper has been forming major tops in the past? In each case the ultimate top was slightly above the previous top, but the final (time-wise) medium-term top that preceded the slide was not necessarily above the highest top. That was not the case in 2011. This is important for the current situation, because this means that copper does NOT have to rally to or above its 2024 high in order to start its powerful slide.
It could be the case that the slide is starting or about to slide.
This is important not just on its own (and because copper’s slide would supercharge profits on our short positions in FCX) but also because of the implications that all this has on the precious metals market. If you look at the orange arrows and orange vertical dashed lines, you’ll see that the final tops in copper are aligned with the key tops on the precious metals market. And I don’t mean just short-term tops – those were massive shorting opportunities (or opportunities to exit one’s long positions) that brought huge amounts of money to those brave enough to trade at or close to the tops. Mining stocks then fell for MONTHS.
We’re either right at this place right now or close to it. We are already positioned for those huge moves lower (you are, right?), and now it’s time for doing the most important thing – which is not doing anything.
The Importance of Pattern Recognition
What's particularly telling is that Citigroup itself can't maintain a consistent position - shifting from $8,500 to $10,000 based on short-term market movements. This contrasts with my consistent framework that has identified these tariff-induced rallies as potential selling opportunities rather than buying ones.
Even after acknowledging the temporary nature of the current tightness, Citigroup still leads with the headline-grabbing $10,000 target rather than emphasizing the inevitable pullback they themselves predict will follow.
Looking Beyond the Short-Term Noise
The recent price action in copper aligns with the analytical framework I've presented before: an emotional reaction to tariff news that appears bullish on the surface but may lack sustainable fundamentals.
The pattern I've identified suggests this tariff-induced rally could be marking another local top rather than the beginning of a sustained move to $10,000 - especially as "tariff fatigue" sets in and market participants increasingly recognize these patterns.
As I've maintained throughout my previous analyses, the primary trend remains intact, and I continue to believe that copper and related mining stocks may be poised for significant downside once this predictable tariff effect fades.
Q&A Regarding My Yesterday’s Analysis
Based on my yesterday’s analysis, there were several interesting comments (thank you!) posted on Golden Meadow, and I’d like to share my replies to some of them over here:
Regarding Yield Curve Inversions
Gary raised an excellent technical point about yield curve inversions. The commonly cited 10-2yr and 10-3mo spreads have indeed de-inverted in recent months. In my yesterday’s analysis, I was referring to the broader set of yield curve measures, including some less commonly cited but historically significant segments like the 30yr-5yr spread, which remained inverted for an extended period.
What's particularly interesting is that the process of de-inversion itself often precedes economic weakness. Historically, it's not the inversion but the subsequent steepening (as short-term rates fall faster than long-term rates in anticipation of Fed easing) that has signaled imminent economic challenges.
Historical Evidence of De-Inversion as a Warning Signal
This pattern has been remarkably consistent across economic cycles:
· 2007-2009 Great Recession: The yield curve was inverted through much of 2006 and early 2007. In mid-2007, the curve began to de-invert as the Fed initiated rate cuts in September 2007. The recession officially began in December 2007, with the severe financial crisis following in 2008.
· 2000-2001 Recession: Following yield curve inversion in 1998-2000, de-inversion began in late 2000 as the Fed started cutting rates. The recession officially began in March 2001, with the dot-com collapse accelerating afterward.
· 1990-1991 Recession: The yield curve inverted in 1989 and began normalizing in early 1990. The recession officially began in July 1990.
· 1981-1982 Recession: After significant inversion in 1980-1981 under Volcker's Fed, the yield curve began normalizing in mid-1981 just as the recession deepened through 1981-1982.
The Deflationary Case for Gold Miners
Gary correctly points out that gold's "real" price can perform exceptionally well in deflationary environments. This occurs because gold mining economics improve dramatically when input costs fall while gold maintains its value. This creates potential leverage in mining stocks if we enter a more pronounced disinflationary environment.
However, in the short- and medium-term what happened when there were economic problems (that deflationary pressures would likely lead to)? Back in 2008 when crude oil’s and copper prices declined substantially, gold declined while silver and miners truly plunged. Yes, they all recovered before stocks did, but the initial reaction was down, and it lasted for months.
The lower CPI readings could be early signals of this scenario developing.
Technically Speaking
Gold moved higher, closer to its recent high, we saw the same thing in the mining stocks, and silver is clearly outperforming gold on a short-term basis.
(You may want to click on the chart above to expand it.)
Once again, silver’s outperformance suggests that this rally should not be trusted.
Gold is up in today’s pre-market trading, which might be due to the tensions before the PPI and initial jobless claims. As the dust settles, gold might move back down – along with the rest of the precious metals sector.
The USD Index is showing a tiny bit of strength here, which might seem insignificant, but in reality, it’s important because the USD Index moved back above the 61.8% Fibonacci retracement level after – most likely – bottoming at its previous local low.
So, yes, all my previous points remain up-to-date and the enormous profit potential for the short positions in the mining stocks and in FCX remains intact.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief