BALTIMORE, MD - There's no point putting lipstick on a pig. Fact is, copper is looking quite miserable. This morning the critical construction metal opened at a multi-month low. But we're not throwing in the towel just yet. Copper still has an ace up its sleeve: China.

There's no denying that copper prices are closely tied to new home construction. Fact is, the average U.S. home contains about 400 pounds of copper, mostly in the form of electrical wire. So, clearly, a slowdown in new home construction will have a negative impact on copper prices. And unfortunately for copper and its producers, that's exactly what's happening today.

The number of new houses being built in the U.S. has now fallen to its lowest level in 15 years, causing a significant build in copper inventories. Inventories monitored by warehouses in London, Shanghai and New York are at the highest levels since June 2005 and they continue to grow. In fact, NYMEX copper warehouse stockpiles have increased nearly 50% in the past 60 days alone.

As you would imagine, this build in inventories has put major downward pressure on copper prices. Continuing a multi-month slide, NYMEX copper plummeted to a low of $2.5248 per pound yesterday, a nine-month low. In the past two months, copper has shed almost $0.70, or about 21% simply because there are just no buyers in the market.

It's seems like it's the perfect storm for lower copper prices. But I think investors are underestimating one major demand dynamic within the market: China.

You see, while the U.S. consumes over 5 million pounds of copper per year, it is not the #1 consumer. Fact is, China is the world's largest copper consumer. And this year they will use more of the metal this year than ever before to feed its ever growing economy.

Economists expect China's GDP to grow 10.5% in 2006 over the previous year and a further 8% in 2007. Because of this extreme growth in GDP, number crunchers say that China's copper consumption may grow by 3% to 5% in 2006 and by as much as 5% in 2007. So while demand for the construction metal may slip in the U.S., it's evident that the world's largest market will still be quite healthy.

Copper prices have gained more than fourfold in the last five years as demand for the construction metal boomed in China. This boom hasn't fizzled out yet.

At last look, copper for March delivery was trading at $2.57.50 per pound. I believe that a push below $2.50 is more likely than a recovery at this point, as there is little in terms of support from what we can see. However, I expect a snap-back rally to move prices above the $3.00 mark again sometime in the next few months.

I recommend that you take this time to add to our copper positions while prices are still stagnate.

Until next time,

Luke Burgess
GoldWorld.com