Copper likely to rise, but US yields could be key to short-term price action

Copper enjoys bumper year

Copper has historically been heralded as one of the best barometers of economic health given the industrial uses of the metal. While the price of commodities collapsed in the early months of 2020, it soon become evident that manufacturing would form the backbone of the Chinese pathway out of the crisis. It took just four months to recover that quarter one (Q1) sell-off, and we have been moving higher since thanks to huge demand out of China.

However, while we are seeing some signs that the Chinese could take their foot off the gas, there are expectations that Western demand will increase as countries plan to bring about huge infrastructure spending aimed at a transition towards green energy. Thus, there is the basis for further upside as countries continue to stimulate their way out of the crisis, with huge infrastructure spending likely to remain a key driver of demand going forward.

Goldman Sachs has bolstered support for this metal, with the investment bank calling for prices of $11,000 in the coming 12 months. Meanwhile, they see a longer-term view of $15,000 per tonne by 2025. With electric vehicles and a global energy transition set to dominate the years ahead, it seems the demand-supply dynamic points towards further favour for copper.

The daily chart highlights how we appear to be preparing for another leg higher after a period of upside from here. The break up through $9199 looks to have ended the recent pullback phase, with a rise up through $9615 growing in likeliness after that break. To the downside, we would need to see a move back below $8670 to signal an impending period of downside.

Yields highlight near-term risk

While the long-term outlook remains favourable, a look at the fixed income space does provide some grounds for hesitancy. The US 10-year yield has taken a step backwards over the past fortnight, with the huge ramp-up seen over the past six months finally starting to unwind.

Interestingly, US yields have been closely aligned to both copper prices and the gold/copper ratio. While the ratio of gold to copper is understandably a risk-on-risk-off gauge just like the10-year yield, the fact that copper alone tracks the 10-year does bring some clues for the near term.

While copper has largely ignored the reversal in yields, a continuation of that pullback could hold back the metal for the near term. However, with the economic outlook improving, we are likely to see yields ultimately push higher, meaning that the medium-term outlook looks positive for both markets.