– Goldbugs Waited Years For A Massive Comex Short Squeeze, And Finally Got It… Just In The Wrong Metal:
For much of the past decade, gold bugs religiously tracked the physical gold inventory located in the various gold vaults that make up the Comex system, eagerly awaiting the day when there would be more deliverables (via paper shorting of gold) than physical in storage, sparking a historic, Volkswagen-like short squeeze. Well, the day of a historic Comex short squeeze finally arrived… only it wasn’t in gold but in the far less precious metal that is copper.
It all started one month ago, when we reported that in an attempt to enforce sanctions against Russia that actually worked (as opposed to the joke that is the western “oil embargo” now openly breached by absolutely everyone), the “US, UK Banned Deliveries Of Russian Copper, Nickel And Aluminum To Western Metals Exchanges.” There, in our conclusion, we wrote that “history has taught us that the market will price in some “full-sanction” risk premium which when combined with the current macro bid (reflation narrative, electrification, “copper is the first AI commodity” etc.) means we expect a complex wide rally.” Little did we know how truly historic said rally would be just one month later.
As anyone who has been following the recent moves in the price of copper – which is hitting daily record highs – knows by now, a massive dislocation between the prices for copper traded in New York and other commodity exchanges has rocked the global market for the metal and prompted a frantic dash for supplies to ship to the US.
The source of the disruption, as Bloomberg reports, is a record short squeeze that has driven up copper prices on the Comex exchange to the point where the premium for New York copper futures above the London Metal Exchange price has rocketed to an unprecedented level of over $1,200 per ton, compared with a typical differential of just a few dollars.
The blowout in that price spread has wrong-footed major players from Chinese traders to quant hedge funds, all of whom are now scrambling for metal that they can deliver against expiring futures contracts!
Adding fuel to the fire, the surge in the price is not just driven by technicals but also reflects the surge of interest from speculators after forecasts that long-term copper mine production will struggle to keep pace with demand. We have discussed the fundamental case for copper in “The Copper Supply Shortage Is Here“, and most notably in “the Next AI Trade” where we said that copper is starting to show signs of what Goldman has called “AI exposure” considering it is an essential material to produce power, and added that Goldman recently has gone full-bore pushing for copper (see the following note from Goldman S&T “Turning Copper into Gold” available to professional subs).
While less important than the LME, Comex, which is part of the CME Group, is a key playground for investors, some of whom have used the exchange to build up large bullish bets on copper in recent months
“The broader story is that there are new investment funds that are boosting their exposure to copper for a multitude of reasons, and while that’s a global trend, a huge amount of that investment has been heading to Comex,” said Matthew Heap, a portfolio manager at Orion Resource Partners, the largest metals-focused fund manager.
As shown in the charts above, while copper prices had been rising for months, this week’s spike was specific to the Comex and the most-active futures contract for July delivery. By Wednesday, the July price had soared as much as 10%, touching a record high for that contract, even as the global benchmark contract on the LME traded broadly flat. The move, Bloomberg reports citing numerous traders and brokers, was a classic short squeeze as market participants who had placed bets on the Comex contract moving back into line with prices on the LME and in Shanghai, the other global copper benchmark, were forced to buy those positions back as prices rose, creating a vicious cycle and sending the price to a record.
Indeed, as Colin Hamilton, managing director for commodities research at BMO Capital Markets, said the spread of more than $1,000 a ton between Comex and London was “something never seen previously,” adding that “there has been a squeeze on short positions into contract expiry, exacerbating the move.”
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